We explain the concepts of debt ratio, “remainder to live” and the borrowing capacity available. Before you start looking for a new home and become a homeowner, it is essential to know the share of income available to pay off a loan. This is what will allow us to assess the budget necessary to carry out such a project.
Today we are going to explain the calculation of the debt ratio, define the “remainder to live” and assess what is the available repayment capacity. Exciting, isn’t it? ?
The debt ratio
To define the available repayment capacity, ie the reasonable amount that can be spent on a repayment, the rate of disposable income must be calculated. This is called the debt ratio: this is the threshold above which the borrower represents too high a risk of default.
This rate is obtained by doing the following calculation, often on a monthly basis:
Debt ratio = Borrowing charges (cost of a loan per month) × 100 ÷ (net income, net salary, allowances, annuities received, etc.)
This percentage should not exceed 33% of the borrower’s income. Not being a statutory rate, it can vary up or down depending on the personal situation and the kindness of the banker. ?
The net salary is not the only criterion taken into account to define this rate. The overall profile of the borrower will be analyzed according to certain criteria such as the stability of the employment contract, income, seniority, the amount of personal contribution, the family environment (dependent children).
From an income, it is possible to determine the sum which corresponds to a debt ratio. Take the example of a single person with a net salary of $ 1,700 / month.
1700 x 0.33 = $ 561
In this example, the debt ratio is 32.9%. The reimbursement limit for this person is therefore around $ 561 per month to have enough “rest to live”.
The “rest to live”
The “remainder to live” corresponds to the salary from which we subtract all fixed expenses, that is to say recurrent: rent, taxes, electricity bill, food, credits in progress etc. These expenses are said to be incompressible, that is to say that they cannot be cut from a budget. It is not possible to reduce the amount of taxes while it is possible to choose not to go out to a restaurant, for example.
Rest to live = Household income – (Fixed charges, rent, taxes, food etc.)
There is no minimum remainder rate, it depends on the amount of income. However, there is an essential rule, the lower the income, the more you have to converse with a significant remainder of living rate.
Take the example of a single person with a salary of $ 1,700 net. Suppose that she has a monthly rent of 650 USD including charges, a car loan of 150 USD / month and that she paid her taxes monthly and pays 120 USD.
Remainder to live = 1,700–650–150–120 = $ 780 Remainder of living rate = 780 x 100 / 1,700 = 45%
The remainder of living rate, here 45%, represents the share of income that can be used to live and make other expenses, such as clothing, outings, or take out a loan.
In the case of a couple with comfortable incomes, the “remainder to live” will be higher and the lender will be able to grant a higher debt ratio of up to 35%. (just add the two incomes to which we will subtract the incompressible expenses of the two people).
Is it possible to optimize this rest to live? Yes! You will have to do a little analysis of your expenses to understand what can be optimized: cancel subscriptions that are of little use, lower excessively high bank charges, reduce outflows, etc. There are many ways to achieve this goal, thanks to Bankin ‘! You can take a look at the Categories and Budgets features.
The repayment capacity
The repayment capacity corresponds to the amount available to make a repayment after deduction of the credits in progress if there are any (automobile, studies).
Let’s take the example of a single person with a salary of $ 1,700, $ 650 in rent including charges, a car loan of $ 150 and $ 120 in taxes.
Repayment capacity = (net income × 33%) – (current borrowing costs)
Repayment capacity available = (1700 x 0.33) – 150 = $ 411
With a car loan equivalent to $ 150 / month, this person has a current debt ratio of 8.8% (150 x 100 / 1,700 = 8.8%). For this reason, it has a borrowing capacity of $ 411. Current loans, auto, consumer or other, therefore accumulate not to exceed the famous limit of 33%.
Although a debt ratio of 33% is considered to be the limit to be respected, it is important to remember that it also depends on the creditor and more broadly on the profile of the borrower.
The borrower’s “living” will strongly influence the debt ratio up or down, while the borrowing capacity takes into account the loans in progress. These calculations will then be very helpful in creating a budget and determining the current amount that may be available for the repayment of a loan.