The debt ratio in France is 33% maximum, here is how to calculate your own debt ratio for the subscription of a mortgage.
Home loan: calculate the debt ratio
The debt ratio is one of the most important criteria that is studied by banks and credit organizations that grant mortgages. In France, the financial authorities authorize a maximum debt ratio of 33%, that is to say that one cannot devote more than a third of its income to the repayment of debts.
The formula for calculating the debt ratio of a home loan remains relatively simple, we divide the amount of the monthly payment in relation to the household income, then multiply by a hundred to have a percentage: Monthly payment / Income X 100 . There are two ways to calculate a debt ratio for a mortgage, we can first calculate the maximum amount that can be spent on credit repayments, we can also calculate the current debt of a borrower.
Calculate the debt with the maximum monthly payment
For example, a couple receives total income of 3000 us dollars monthly, Mr. and Mrs. each receive income of 1500 us dollars net, which amounts to 3000 us dollars net household income. They want to buy a house and would like to have an estimate of the monthly payment that they can reimburse:
- 3000 X 33% = 990 us dollars
This couple will be able to repay a maximum of 990 us dollars in monthly loans, all types of loans combined, including the mortgage.
Calculate the debt ratio with the current mortgage
For example, a couple receives income of 2,000 us dollars and have a monthly mortgage loan of 454 us dollars. To calculate their debt, just divide 454 us dollars by 2000 and multiply the sum by one hundred to get the percentage:
- 454/2000 X 100 = 22.70%
The household has a very comfortable debt ratio, since the latter is well below 33%.
Tips to remember about debt with a mortgage
The debt ratio is very useful in the context of a mortgage loan but also in the context of daily financial management. It helps to prevent a complicated financial situation, that is to say that for borrowers who wish to obtain a mortgage, this allows them to be aware of the debt limit and it is advisable to always keep a margin of maneuver by going into debt for example between 25% and 30%.
For households that already have a mortgage, calculating debt regularly helps maintain balance in finance, especially if there are changes in income or new loans have been taken out.
How do you know if your debt is good?
The debt limit is 33% but a household that is located at this limit will not be able to face an unforeseen expenditure or a fall in income, it is this type of situation that can switch into over-indebtedness, which remains an uncomfortable financial situation with significant consequences for the finances of the home.
To keep good management of your finances, you have to keep in mind the debt scale presented like this:
- 0% to 10%: very comfortable debt ratio
- 11% to 25%: comfortable debt ratio
- 26% to 30%: correct debt ratio
- 31% to 33%: limit debt ratio
- 34% to 40%: dangerous debt ratio
- 41% to 50%: over-indebtedness
- 51% and more: very critical over-indebtedness
Between 0% and 30% of debt, you are in a comfort zone, there is always a risk but having flexibility allows you to anticipate changes in situations, unforeseen expenses and power restore balance in a few months.
Beyond 33% of debt and up to 50%, your situation is abnormal, it is necessary to have recourse to a solution to restore a debt lower than 33%. The repurchase of credit can be a solution to consider in order to reduce the monthly payments and spread the debts.
Beyond 50% indebtedness, it is necessary to turn to the Banque de France to file an over-indebtedness file and set up a recovery program, with in particular the use of a mediator to find solutions to debt repayment.
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