The debt ratio is a term that is often used when it comes to talking about a budget or buying real estate. But what exactly is it? Before signing a sales agreement, one must first assess its debt ratio. This helps to orient the search for the good in the price range corresponding to its borrowing capacity.
Debt Ratio: What is it?
In general, the debt considered by the lender, as being correct, is about 33% (or 1/3 of your income). Banks use this index to assess your repayment capacity (solvency). This is the percentage of total loan charges (all credits: consumption, revolving, real estate) relative to the borrowers’ income.
Debt Ratio: How is it calculated?
Your current debt ratio is the total of your expenses (current credits, rent) on all of your income, multiplied by 100. It shows you the margin available to contract a new credit.
How to optimize your debt ratio?
Depending on your situation, there are several hypotheses.
In the case of variable income, it is important to take into account your fixed salary as a basis. Depending on your seniority, the lending institution will be able to average your salaries over the past 3 years and include bonuses and commissions.
In the case of a high salary, banks will be more flexible if you can prove that your expenses can be above the threshold of 33%.
In the case of low incomes, the banks calculate the “remainder to live” which determines whether the household can support itself after payment of the credit. The “remainder to live” will be calculated based on the residual income per person after payment of the charges and the loan. A debt ratio is acceptable when the sum per person remaining available makes it possible to support the daily expenses.
The debt ratio of 33% can be modulated upwards or downwards, depending on the study of your loan file. For a household with comfortable incomes, with a high “rest to live”, the bank can accept a debt ratio of 35% or more. On the other hand, some borrowers with lower or lower incomes will not be able to obtain loans above 30% of indebtedness.