Becoming an owner is the dream of many French people. Owning your house or apartment brings a certain serenity and it is sometimes the project of a lifetime. For others, this represents an investment to, once paid off, use rents as a supplement to salary and later to supplement retirement.
Before drawing plans on the comet and dreaming of castles in Spain, it is necessary to carefully prepare his project , step by step, and the first is to calculate its borrowing capacity to estimate its budget for a mortgage.
- 1 What is borrowing capacity?
- 2 How to calculate your borrowing capacity?
- 3 Who borrows?
- 4 Calculate your debt ratio
- 4.1 Simple example of borrowing capacity calculation:
- 5 The personal contribution
- 5.1 How to make your personal contribution?
- 5.2 If you already own
- 5.3 Employee Savings Plans
- 6 How to increase your borrowing capacity
- 7 Restructuring of credits in progress
- 8 Two loans rather than one
What is borrowing capacity?
A bank loan involves monthly payments over several years, often even one or two decades, and the organization you are going to solicit must ensure that you have the capacity to meet those deadlines. Once the borrowing capacity is calculated , you will know the maximum amount that will be granted to you for the purchase of your property. You do not have to go through the ads or go around real estate agencies before you have calculated your borrowing capacity.
How to calculate your borrowing capacity?
There are a multitude of simulation sites to assess your borrowing capacity but you need to understand how it is calculated to work on its weaknesses, to improve it and get the best loan possible .
The first element to be determined is the number of borrowers. Are you the only one to borrow or is it a project that your spouse will be associated with? In addition to the commitment that this implies, this can completely change the situation if the two incomes are totally disproportionate or if one has a very stable situation when the other belongs rather to the precarious category.
Calculate your debt ratio
The debt ratio takes into account household income on the one hand and its expenses on the other hand to assess the percentage of resources that are already mobilized for recurrent expenditure payments.
The rule in France is that banks do not exceed the 33% of debt ratio to grant a mortgage. However, they grant exceptions for particular files. For example, a household with large fixed costs, but with high incomes or a young person, but whose job is expected to show strong growth in the near future, will probably benefit from privileges. Exemptions are also issued to borrowers whose remaining living remains significantly higher than their needs.
Simple example of borrowing capacity calculation:
If a couple has regular income (CDI or similar) of 3000 € per month, without any loan in progress, the bank can grant a loan with monthly payments of 33% * 3000 = 1000 € per month.
The borrowing capacity of this couple is 1000 € per month.
The high debt ratio allows the bank to assess the risks inherent in the loan. It allows him to calibrate the amount that can be paid by a borrower without unbalancing his budget.
To calculate your debt ratio , you must consider in the income column:
- Various pensions
- BIC (Industrial and Commercial Benefits)
- BNC (non-commercial benefits)
- Agricultural benefits
- Land revenue
- Regular financial investment income
- And other guaranteed income
Extraordinary premiums or other non-recurring income and social benefits are not included in this calculation.
In the column of charges, it is necessary to integrate:
- Monthly mortgage payments for homeowners
- Monthly payments of credits in progress (consumption, automobile …)
- All other recurring charges
The debt ratio will then be calculated as follows: Sum of current charges / Sum of revenues.
The total of the income column minus the total of the expense column gives you the rest to live . Its amount must be equal to the incompressible current expenditure of a household.
The remainder to live more influences a bank than the debt ratio.
The personal contribution
Your personal contribution must, so that a bank appreciates your file at best, represent between 10 and 20% of the price of the good which you wish to buy. It is obvious that the more your contribution is consequent, the more your borrowing capacity increases, the more the duration of the loan and / or the monthly payment will be reduced and the easier it will be to obtain the loan.
How to make your personal contribution?
The most common is to unlock the savings products you have dedicated to this project: life insurance, savings products … It is always advisable to keep a minimum amount in a savings account as a precaution in case of unexpected , more or less serious.
If you have several savings products, life insurance, etc., study with your banker the best solution to maximize the tax benefits.
If you already own
In case you resell your home to buy a new one, your contribution will be mainly composed by the value of your old home.
If you have already resold your property, the calculation is very simple: you have the actual selling price from which you deduct current home loans, if any, and you reinject this amount into your personal contribution.
If your old property is being sold, you will use the bridge loan. First of all, you have to make an assessment of the value of your old home as accurately as possible based on the comparison of several expertises of merchants property.
The amount of the bridge loan is calculated on the basis of this expertise. On average, it is between 50 and 80% of the estimated value, taking into account the repayment of any real estate loans in progress.
Employee savings plans
If your project concerns your primary residence and you have a salary savings plan, it may be wise to unblock it early. Ask your company and your banker.
How to increase your borrowing capacity
It is in your best interest to have the highest possible borrowing capacity to access the most attractive properties. To improve it, two tracks are worth exploring.
Restructuring of credits in progress
Consumer loans are often subscribed at very high rates. If you already have several consumer credits, it is probably worthwhile to restructure them . This consists of consolidating all its consumer loans into one single loan to have only one monthly payment to settle, lower, but by extending the repayment period.
There will certainly be costs for the restructuring but it will reduce the monthly payment and thus reduce the debt ratio in favor of greater room for maneuver for the mortgage.
Two loans rather than one
It is often advantageous to contract two mortgages rather than one, it is a trick to reduce the cost of monthly payments but without increasing the cost of credit.
By signing two loans, one over fifteen years and the other over twenty years for example, the borrower benefits from a lower interest rate on the shortest loan and thus reduces the amount of interest in the monthly installments of refund. This mechanical decline in monthly payments makes it possible to increase the remainder to be lived and, consequently, to increase the borrowing capacity .
When you make the big decision to buy real estate, before you go on the ads, carefully prepare your project to optimize your borrowing capacity and thus have access to the best housing in relation to your means.