The debt ratio: Definition and calculation

The debt ratio is the maximum percentage of debt that can be considered when borrowing. In general, the limit of 33% debt should not be exceeded; however, this can go up to 35% depending on the situation (for public service workers for example). The calculation of this rate is the sum of your fixed charges, divided by the total of your income, multiplied by 100.

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How to calculate the debt ratio?

Your current debt ratio corresponds to the total of your expenses (often current loans: consumer loans, car loans) over all of your monthly income, multiplied by 100. It indicates the margin available to contract a new one. mortgage credit. The calculation of the debt ratio therefore represents the share of monthly net income that a borrower can devote to the repayment of his real estate project loan.

Calculate your debt ratio with the following formula: (Borrowing charge) x 100 / (net income) = Debt ratio
With:

  • Borrowing charge: sum of monthly payments of current loans + loan to subscribe
  • Net income: net income of each borrower
debt ratio calculation

How does the debt ratio affect your borrowing capacity?

The debt ratio is a term that is often used when it comes to working out the total amount of the budget for the purchase of a new property.

Before signing a sales agreement, it is important to assess your debt capacity and therefore your borrowing capacity. It is also necessary to calculate the loan amount that you can get.

How it works ?

The debt ratio is considered to be correct by the lender when it is around 33% (i.e. 1/3 of your income). Banks use this index to assess your repayment capacity (your creditworthiness). This is the percentage of the total cost of charges for all credits combined: consumer credit, revolving, revisable, auto, real estate….

What limits to the debt ratio?

It is important not to have too high a rate because the banks analyze your financial situation. Thus, the maximum overall effective rate not to be exceeded is 33%; at the risk of seeing your loan application be refused if your profile is deemed financially unreliable by financial organizations. You have to be careful not to be over-indebted, it is for this reason that the repurchase of mortgage exists.

What income is taken into account for the calculation of the debt ratio?

Income taken into account

Each lending institution has its own rules regarding the income taken into account . You can nevertheless include this income in the calculation of the maximum debt ratio:

  • net salary (for each borrower)
  • premiums (thirteenth month, ...)
  • non-salaried professional income
  • commissions
  • alimony
  • any other pensions (disability, retirement, etc.)
  • housing allowances (APL)…

Income not taken into account

You can exclude the following income from the debt ratio calculation:

  • exceptional premiums (non-contractual therefore perceived as irregular by the banker)
  • professional indemnities (professional illness or even work accident)

How to optimize your debt ratio?

There are several solutions to optimize your debt ratio and bring value to your file with a credit institution.

If you have a low income

In the case of modest incomes, credit institutions calculate the “remainder to live” which determines whether the household can meet its needs after payment of the loan. The "remainder to live" will be calculated based on the residual income per person after payment of loan charges and other charges. The debt ratio is acceptable when the sum per person remaining available can support current expenses.

The debt ratio of 33% can be modulated up or down, depending on the study of your loan file. For a household with a comfortable income, with a high “remaining to live”, your banking establishment may accept a debt ratio of 35% or more. Conversely, some borrowers (or co-borrower) with lower or less regular income will not be able to obtain a loan beyond 30% of debt.

If you have variable income

In the case of variable income, it is especially important to take into account your fixed salary as a basis. Depending on your seniority, the lending institution may take an average of your salaries over the last 3 years and include bonuses and commissions.

Use a mortgage broker

In order to obtain your loan under the best conditions and to refine your debt ratio, you can call on an expert in the field of credit who will negotiate for you a lower borrowing rate and cheaper external borrower insurance. .

Make sure you get a loan at the best mortgage rate with Labougeotte, an expert mortgage broker since 1999! Entrust your credit application Labougeotte, mortgage broker since 1999.

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Do not confuse debt and over-indebtedness

It is important to distinguish between these two terms which do not have the same meaning. Being in debt and being over-indebted do not have the same impact !

In the event of a debt situation , you have one or more loans that you are in the process of repaying and for which you are paying a monthly payment without any particular problem.

In the event of over-indebtedness , you are unable to pay your loan and you will have to face bank charges. If your monthly repayment installments are too high, it is possible to buy back credits or consolidate credits in order to reduce the amount of the monthly repayments.

Questions & Answers on the calculation of the debt ratio

➗ What is the formula for calculating the debt ratio?

The following formula is used to calculate the debt ratio: EXPENSES / REVENUES X 100.

🛑 What is the maximum debt ratio not to be exceeded?

It is recommended not to exceed 33% of debt, or 1/3 of the borrower's income. Depending on your financial situation, it may vary higher or lower.

💶 What income is not taken into account?

The income not taken into account are exceptional non-contractual premiums and professional indemnities (occupational diseases or work accidents).