Obtaining a good mortgage can be a challenging process, especially if you are not familiar with the key factors that banks and other lenders consider when evaluating your application.

Among these factors, one indicator is particularly crucial and can determine whether or not you receive the financing you need: Economic effort ratio. In this article, we will explore what it means, why it is important, and how it influences your ability to secure a mortgage.

Economic effort ratio

The economic effort ratio is an indicator that measures the percentage of your monthly income that goes towards paying obligations (debts, rent, insurance, and other recurring expenses). It is the way lenders evaluate if you can comfortably manage mortgage payments along with your other expenses.

How is it calculated?

The first thing you need to know is that this indicator is calculated on a monthly basis. To calculate the economic effort ratio, the monthly expenses of the individuals involved in the mortgage, including the future mortgage payment, are summed up and then divided by the total net monthly income. Finally, this result is multiplied by 100 to obtain the percentage.

Why is it important for me?

Lenders use this ratio to ensure you are not taking on a mortgage debt that is unsustainable. Some financial experts recommend keeping it around 40%, others suggest about 35%, and some even use gross income for their calculations.

At Hoteland, we recommend that to avoid over-indebtedness, you follow this general advice: an acceptable economic effort ratio is below 30%.

Based on our experience, the only way for the lender to consider that you are not taking on too much risk is to stay below 30%. Therefore, 30% is the limit to aim for, not a higher one.

However, it is true that, in very specific situations and with the right help, it may be possible to obtain a mortgage above this limit. The best course of action if you find yourself in this situation is to contact a mortgage advisor who can analyze your personal situation and guide you.

At Hoteland, we are the perfect partner to assist you in cases like these. Our extensive experience in managing such processes enables us to streamline the analysis and approval of mortgages.

We are accustomed to managing complex situations and finding solutions tailored to each client. Additionally, our team of experts will provide you with personalized service, ensuring you receive the support and guidance necessary to obtain the best possible mortgage according to your specific circumstances.

What does the Economic effort ratio not measure?

Many people tend to confuse the Economic effort ratio with the Mortgage Burden. You should know that, although they may seem similar, the Mortgage Burden only takes into account mortgage payments, so it is not a true representation of your monthly effort.

The Economic effort ratio also does not account for rent payments that you will forgo after purchasing your new home, nor other expenses that you decide to eliminate before starting to pay your new mortgage.

Similarly, remember that the Economic effort ratio does not take into account your total indebtedness, but rather your monthly solvency.

How to Improve my Economic effort ratio?

If you have calculated your ratio and it is above or close to 30%, you should know that there are only three ways to decrease it, and there is no instant solution:

1) Increase your income: Consider seeking an additional source of income or a salary increase.

2) Reduce the loan amount: Opting for a more economical property or making a larger down payment can also help overcome this issue.

3) Adjust the loan term: A longer term can reduce your monthly payments.

Conclusion

The economic effort ratio is essential when applying for a mortgage, but managing it can be challenging. 

If you have specific questions about your case, the mortgage advisors at Hoteland are available to offer personalized guidance and help you make well-informed decisions, not only with the economic effort ratio but with the rest of variables.