When building your mortgage, the bank or the lending institution will tell you a number of conditions to be met in order to obtain your funds and carry out your real estate purchase project. Among these conditions, there is what is called the “maximum debt ratio”, a rate calculated according to your income and your monthly expenses and intended to determine how much you can repay each month without taking the risk of fall into debt. Let us see more precisely what corresponds and how the mortgage loan debt rate is calculated.
What is the maximum debt ratio?
The maximum debt ratio corresponds to your borrowing capacity, that is to say the amount that you will be able to borrow for your real estate acquisition calculated according to the amounts that you will be able to repay each month.
Expressed as a percentage, the mortgage loan rate measures the difference between your cash inflows (overall income) and your outflows (miscellaneous charges). It is commonly accepted that the maximum debt ratio that a borrower can claim is 33%: no more than a third of your monthly income must be spent on repaying the loan maturities.
The remaining percentage is called “remainder to live”: as the name suggests, it is the amount of money you will have left to live on each month, once the loan term has been paid (to buy food, clothing, paying for fuel, entertainment, etc.).
The debt ratio is therefore the central element of your credit file: it is it that determines the amount that you will be able to borrow for your purchase, based on your monthly repayment capacity.
How to calculate your mortgage loan debt ratio?
Let’s go into the details of how to calculate your maximum debt ratio:
- On the one hand, there is your income: everything that comes into your coffers during the month, namely the net salaries, the profits of your business if you are self-employed, the rents you receive from a rental property., pensions, annuities, and even the various social benefits to which you are entitled.
- On the other hand, there are your expenses: all your monthly fixed charges, in particular rents, pensions or credits that you could have taken out (a previous mortgage or a car loan, for example).
From this data, simply divide the charges by the revenues to obtain the maximum debt ratio.
Take an example: each month, your net income amounts to $ 1,500. You have fixed charges in progress of $ 450 which correspond to your monthly rent, but these charges will not be taken into account in your calculation since your real estate purchase will be your main residence and you will no longer pay rent. In this case, the calculation is simple: 33% of $ 1,500 = $ 495. Your maximum debt ratio is therefore $ 495 per month, with a living amount of $ 1,005.
Let us take another, more complicated example: the net household income is $ 4,000. You also receive a monthly rent of $ 500 for an apartment you own. For this apartment, you have already contracted a rental property loan, for which you repay each month $ 450. In addition, you have a car loan that costs you $ 150 monthly. Under these conditions, your maximum debt ratio amounts to $ 835, with a living balance of $ 3,065.
In addition, banks can, depending on the establishment, calculate in different ways with rental income. This is the reason why it is important to go through a broker who knows perfectly the methods of each establishment according to your profile.
Use our mortgage loan rate calculator to prepare your loan application!
Special conditions of the debt ratio
However, this 33% threshold may change depending on personal situations. Take three special cases:
- If you have low income: the bank or lending institution does not take into account the mortgage loan rate, but the family quotient.
- If you have variable incomes: in the event of changing incomes (for example if you touch a fixed salary with important bonuses or commissions – within the framework of professions like real estate agent or commercial), it is the fixed salary that he must be used for calculation. However, it is possible to negotiate with the lending institution to exceed the debt ratio by taking into account your additional income (if they are regular).
- If you have significant income: the maximum debt ratio can be increased if your remaining living is more than enough. In fact, a lender will consider a remainder of $ 1,005 and $ 3,015 differently. In the second case, exceeding the 33% threshold will not pose major risks for the comfort of life of the household.
Remember to prepare your credit file well in advance by calculating your maximum debt ratio, and go see your broker with all the elements in hand!