The banking risk analysis differs according to the type of real estate purchase. Thus, the calculation of the debt ratio will not be the same whether you buy your main home, your second home or you realize a rental investment. Focus on the study of a rental file and the method to calculate the debt ratio .
The study of the financial profile of an investor
A few words first of all to know how the bank apprehends the file of a real estate investor. As many say, not everyone is welcome. Between the owner of a principal residence who is preparing his retirement by buying an apartment for the purpose of renting it and an investor whose real estate holdings include only the rental and who is in his umpteenth operation, the reception will not be all the same.
Which method to calculate the debt?
We will tackle the problem by studying the situation of the investor from two angles, in the manner of the bank’s risk analysis service:
- By calculating the ratios before and after rental investment operation.
- By comparing these results with the borrower’s wealth and financial situation.
We will take a numerical example to measure the impact of the real estate transaction.
General formula of calculation
Let’s take a simple example of a couple of investors who owns his principal residence on which he pays € 650 a month. Their professional income amounts to 3300 € net monthly. They plan to carry out a rental property transaction with the objective of improving their purchasing power at the time of retirement. The new mortgage will force them to repay another € 400 a month but they will receive in return € 500 gross rent . They are considered to have no consumer credit.
Calculation before operation
Just take the previous formula
The debt is very good since well below the fateful threshold of 33%. The rest to live is also significant with a balance of 2850 € after repayment of the loan.
Calculation after operation
Despite the fact that rental income covers virtually the monthly payment of the new loan, the debt ratio will increase considerably.
First, the bank will apply a discount to calculate the expenses (property taxes, property tax, etc.). In general, it retains 60 to 70% of gross revenues. We therefore apply a 30% discount on the € 550 rent. The net income retained will therefore be € 385.
We have voluntarily taken the example of a real estate transaction where rents cover almost the monthly payment to show the impact of a rental transaction on the debt ratio . Be aware that even when you increase the flow (loan monthly payments) and credit (rental income) by the same amount, the debt ratio increases mechanically and sometimes dramatically.
As can be seen, despite the fact that rents cover (to 15 € near) the amount of credit, the couple has almost doubled its debt ratio. Its rate is below 33%, it will obviously have no difficulty in obtaining the loan. However, one can ask the question if the ratio had reached 35 or even 40% or more, which happens quickly when one combines several rental operations .
Simulate your rate with our calculator
All you need is your annual net income including net rents and professional income and the total of all current monthly payments. Be careful to remember only income of certain character.
If you want to appreciate your borrowing capacity: try our calculator
Appraisal of the ratio in the context of a rental transaction
This situation is frequent and your banker will analyze your rental file with a more “indulgent” look at the time of approaching the debt ratio. He will appreciate your overall situation and will focus mainly on the rest to live and the quality of the real estate investment you are considering.
In particular, note that the banks have hardened their position and are reluctant to finance real estate tax exemption operations if they do not deem them quality. It will therefore be necessary to assess the accuracy of your investment and to carry out a complete study to measure the tax impact of the operation.