A real estate project? Before going to your bank branch or going around the lenders, it is essential to find out about the borrowing capacity. Indeed, it is a criterion taken into account by banks in their decision to lend you money or not. Even if this is not the only element taken into consideration, it is of capital importance. But how do banks calculate borrowing capacity? There is a formula based on your income and expenses. Find out which one. And you are also told about the debt ratio as well as the rest to live. Also follow our advice to increase your borrowing capacity.
What is Borrowing Capacity: definition
You have already heard of borrowing capacity or debt capacity, but you ask yourself the question “what is it, exactly? « .
In fact, borrowing capacity refers to the amount that a borrower can obtain from a bank to finance a real estate purchase project. This is one of the most important elements for banks, with the personal contribution. However, you should know that the borrowing capacity does not vary according to the personal contribution of the borrower. What can be favorable to the borrower is the mortgage rate.
In other words, for banks, your borrowing capacity represents the means of verifying your ability to borrow an amount and repay it. It also refers to the amount you can request from the institution as a credit.
In addition, borrowing capacity conditions your loan, even if it is not the only criterion that will be taken into account.
But what is the calculation of borrowing (or indebtedness) capacity based on? There are two determining elements: the debt ratio and the borrower’s living balance.
On the other hand, the duration of the mortgage as well as the interest rate have an influence on the amount that it is possible to borrow from the bank. For example, the higher the rate, the higher the amount of the monthly payments as well as the duration, which reduces the borrowing capacity.
How do banks calculate your borrowing capacity?
There is a formula to calculate your borrowing capacity:
Your income – your fixed charges = your borrowing capacity.
However, behind this seemingly simple calculation formula, there are more complex elements to consider.
Indeed, the calculation of the borrowing capacity varies according to several criteria:
- the debt ratio;
- the amount of the personal contribution;
- the fixed or variable rate of the loan requested;
- the amount of the monthly payments;
- the duration of the loan;
- the age and state of health of the borrower.
To know : it is not the type of property (house, apartment, etc.) that will influence the calculation of borrowing capacity. The bank will only retain the amount. And on the other hand, the formula remains the same whether you apply for a mortgage or a car loan.
What are the incomes and expenses taken into account in the calculation of the borrowing capacity?
The bank takes into account several types of income in the calculation of the borrowing capacity:
- wages and salaries;
- retirement pensions;
- industrial and commercial, non-commercial and agricultural profits;
- property income;
- regular investment and financing income.
As for the charges, they relate to:
- the monthly payments of other credits in progress;
- the rents ;
- alimony paid to an ex-spouse.
To know : these are not exhaustive lists as there may be other regular income and fixed charges. In the same way, not all banking establishments will take into account the same charges.
What is the debt ratio?
If you want to borrow money from a bank to buy a house or an apartment, you will often come across this other term. But, what is the debt ratio?
The calculation of borrowing capacity goes hand in hand with the debt ratio. The latter is calculated by making the ratio between expenses and income. You will thus obtain a percentage which will condition the obtaining or not of the loan.
Generally, the lender is based on a debt ratio of 33% not to be exceeded. However, the bank may decide to grant you a loan even if your debt ratio exceeds this limit. Similarly, a loan application can be refused even if the debt ratio is less than 33%.
Amount of remainder to live
The banks also take into consideration the remainder to live. This is based on minima:
- from 600 to 1000 euros for a single person;
- from 750 to 1000 euros for a couple without children;
- up to 400 euros per additional child.
Of course, these minimums are not strictly adhered to. Each bank has its own criteria and takes into account the situation of the borrower.
How to accurately determine your borrowing capacity?
How to accurately determine your borrowing capacity?
You wonder how much you can borrow for your future real estate project and you would like to have the answer without having to go around all the banks.
Rest assured, it is relatively easy and quick to determine the total amount you are able to borrow by going to sites like https://www.immobilier-danger.com/simulation/calcul-capacite-achat. html.
From this completely free site, all you have to do is indicate your income, that of your spouse if you are borrowing from 2, fill in your expenses excluding acquisition (rent, current loans, possible pension), the type of property that you are going to buy (new or old housing), the amount of your contribution and finally information on your future credit (the duration of the future loan, the interest rate excluding insurance).
Once these few pieces of information have been filled in, you will immediately know your purchasing capacity. You are then free to carry out several simulations to find the formula best suited to your expectations. You will see it by simulating different situations, your purchasing capacity will vary depending on the rate of your home loan, the duration of your loan, the monthly payments to be repaid and also the percentage of debt ratio that the banks will grant you. .
Tips for increasing your borrowing capacity
You have calculated your borrowing capacity and you think that the bank will refuse your mortgage? Know that there are methods to increase your borrowing capacity.
First, look at what can be reduced in your fixed costs. If you already have several other credits in progress (auto credit, consumer credit, etc.), you can renegotiate them or consolidate them to buy back credit. Thus, you will pay a lower monthly payment.
Then, the other solution is to take out two loans. Lenders are not very favorable to this practice, but it remains possible. This way, you will pay less interest and can lower your monthly payments.
With this in mind, it is essential to perform online simulations using available tools. You can also go to several banks to see what they offer you.
Finally, the use of a broker remains an effective solution. This professional will inform you about the points to improve to increase your borrowing capacity.
Read also: What are online banks with no income requirement