How to calculate the effort rate for home loans?

The effort rate refers to the ratio between a family's expenses and net monthly income. To calculate this figure, several factors need to be taken into account, including monthly expenses related to loans such as housing, personal, car and credit cards. The Bank of Portugal advises banks to avoid granting credit when this request results in an effort rate that exceeds 50 per cent.

In general, to maintain a balanced financial life, it is recommended that the ideal effort rate does not exceed 30 per cent. These guidelines aim to ensure a prudent approach to family financial management.

Why is the effort rate relevant?

The evaluation of the effort rate plays a fundamental role not only in the granting of home loans, but also in the banks' overall analysis of the family budget. In the midst of the hustle and bustle of everyday life, it's understandable that many people don't have an accurate picture of the relationship between household income and expenditure. Further complicating matters are inflation and rising interest rates, which have contributed to the constant increase in the prices of products and services, making financial management even more challenging with each passing month.

Calculating the effort rate of a home loan is important because it helps to see whether or not a person will be able to repay the loan. If the effort rate is high, it means that a large part of the money the person earns is used to pay off the loan. This can increase the risk of financial problems. Banks use this calculation to decide whether or not to grant a loan. Generally, they prefer not to approve loans if the effort rate is too high, usually above 30 to 40 per cent. A low effort rate helps ensure that people can cope well with the monthly loan instalments, avoiding financial problems.

What can be done to reduce the effort rate?

When the effort rate is too high, it means that a large part of the money the household receives is used to pay off bank loans.

It's important to consider not only the salary, but also other income, such as disability or widow's pensions, family allowances and even income from other jobs (as long as the person makes the appropriate deductions), when calculating the effort rate percentage.

If your effort rate for your mortgage is too high, one suggestion is to try to renegotiate the loan. This can result in better conditions and a reduction in your effort rate, especially by extending the payment period. Alternatively, you could consider transferring your loan to another financial institution to potentially get better conditions.

If you have several loans, consolidating them into one may be an option to consider. This allows you to extend the payment period or even reduce the interest rate, resulting in just one monthly instalment. This approach helps to improve your effort rate, giving you greater flexibility in managing your family budget.

How do I calculate my effort rate?

Calculating your effort rate is relatively simple. All you have to do is use the following formula:

[Total financial instalments / Net monthly income] x 100 = Effort rate as a percentage

There are some online effort rate simulators that you can use to make your calculations easier. It's important to be aware of your effort rate in order to understand whether it's feasible to apply for a mortgage.

Source: Imovirtual Noticias