Your mortgage capacity to invest in rental property

The income taken into account by banks to calculate your borrowing capacity

Lending institutions rely on your stable and regular income to assess your creditworthiness. Generally included are:

• your net salaries (excluding exceptional bonuses),

• your existing rental income, often adjusted to 70% or 80% to anticipate potential vacancies and management fees,

• your financial income or pensions, if they are recurring and justified.

  
  

In the context of a rental investment, banks may also take into account a portion of expected future rents. Again, they generally apply a discount of 20% to 30% in order to remain cautious. This allows investors not to have their borrowing capacity completely blocked by the new mortgage, since the property itself generates income.

On the other hand, one-off bonuses, exceptional bonuses, or irregular income (micro-business, freelancing without a solid history) are rarely included in the calculation, as they are deemed too unpredictable.

The monthly expenses that reduce your borrowing potential

Unlike income, the bank will examine your financial obligations, meaning all regular expenses that are already weighing on your budget. They are essential because they directly reduce your borrowing capacity.

Among these expenses, we find:

• The monthly repayments of ongoing loans: mortgage, auto loan, student loan, consumer credit…

• Alimony or support payments that you pay each month.

• Contractual commitments such as a car lease, a revolving credit, or any other subscription with financing.

• Recurring overdrafts or declared personal debts.

These expenses are considered non-negotiable obligations, as you cannot escape them. Current expenses (rent, energy bills, food, entertainment) are not included in the calculation of the debt ratio, but they indirectly impact the remaining disposable income criterion.

In summary, the higher your financial obligations, the lower your borrowing capacity. That’s why it is often advised to pay off or consolidate certain loans before applying for a mortgage.

The debt ratio: the 35% rule to know

The debt ratio is the keystone of the calculation. It corresponds to the following ratio:

Debt ratio = Financial Obligations / Net Income × 100

In France, the rule applied by most banks is to not exceed 35%. This means that your loan repayments (including new credit) should not represent more than a third of your income. This limit is a guideline, but some banks may accept a slightly higher rate if the remaining disposable income is deemed comfortable.

Beyond the debt ratio, bank advisors place great importance on the remaining disposable income: the amount you have left each month after paying your expenses and debts.

For example, a household earning €6,000 per month with a 35% debt ratio will have a remaining disposable income of approximately €3,900, which is comfortable. In contrast, a household earning €2,000 with the same debt ratio will only have €1,300 for all its other expenses, which will be deemed riskier.

Therefore, the remaining disposable income allows adjusting the analysis beyond the simple formula and can make a difference in the acceptance of a file.

Income, expenses, debt ratio, and remaining disposable income are the four pillars that determine your borrowing capacity. Mastering these criteria means knowing exactly on what basis the bank will assess your real estate project.