Mortgage affordability is the borrowing limit that a financial institution considers viable based on your income, expenses, savings, and any existing financial commitments. This calculation determines the maximum loan amount you can request and, consequently, the price range of the property you can buy.
Factors That Influence Your Mortgage Affordability
Several factors determine your borrowing capacity:
1. Net Monthly Income:
Lenders will assess the stable, recurring income of all mortgage applicants.
2. Fixed Expenses and Existing Debts:
They will analyze any repayments on other loans, credit cards, or financial obligations that reduce your ability to pay.
3. Available Savings:
Banks typically require you to contribute between 20% and 30% of the property value, plus associated costs (taxes, notary, registration fees, etc.).
4. Repayment Term:
Longer repayment periods reduce your monthly payment but increase the total cost of the loan due to interest.
5. Interest Rate:
The applicable rate directly affects the monthly payment and therefore your borrowing capacity.
Recommended Debt-to-Income Ratio
As a general rule, lenders recommend that your monthly mortgage payment should not exceed 30%-35% of your net monthly income. This percentage allows you to cover unforeseen expenses without compromising your financial situation.
For example, if your household net income is €2,500 per month, your maximum mortgage payment should be around €750-875.
How to Calculate Your Mortgage Affordability Step by Step
Here is a simple method to estimate your own limit:
1. Add up your net monthly income.
Example: €2,500.
2. Multiply by the recommended debt-to-income ratio.
€2,500 x 0.35 = €875 maximum monthly payment.
3. Estimate the repayment term.
Example: 25 years (300 payments).
4. Estimate an approximate interest rate.
Example: 3% per year.
5. Use a mortgage calculator (available on most bank websites and property portals) to work out the loan amount corresponding to this monthly payment.
In this example, a €875 payment over 25 years at a 3% rate would correspond approximately to a loan of €180,000.
6. Calculate how much you will need to contribute from your savings.
If the bank finances 80% of the property price, you will need to cover the remaining 20% plus additional costs (around 10% extra).
Practical Tips Before Applying for a Mortgage
- Always run simulations with different repayment terms and interest rates.
- Take into account your regular expenses and avoid overestimating your ability to pay.
- Compare offers from different lenders.
- Keep a financial cushion for unforeseen events.
Conclusion
Calculating your mortgage affordability is an essential step before starting any home purchase process. It will help you define a realistic budget, negotiate confidently, and avoid future financial problems.
If you need more information or personalized advice, do not hesitate to consult a mortgage professional.