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Effort rate: What is this concept and how is it calculated?

The effort rate is one of the concepts in mortgage credit. In short, the effort rate assesses whether you have the ability to meet the installments of a loan. But what does this concept mean and how is it calculated?

11 Aug 20239 min

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What does the concept of effort rate mean?

The concept of effort rate represents the relationship between the total monthly incomes of a family, versus the amount owed on credit installments. The incomes considered for the calculation of the effort rate are those of the credit holders. That is, if the home loan is taken out by a couple, two borrowers, the total value of the incomes earned by both is taken into account.

This means, let's imagine that the total income of the couple who will apply for the loan, at the end of the month, is equivalent to 1,800 euros, but they have to pay 900 euros in credit installments, including the housing loan. The effort rate will be calculated using these values. After the calculation, the effort rate then shows us the income available for day-to-day expenses, such as groceries, transportation, fuel, education, among others.

As a rule, banks do not accept an effort rate exceeding 30%. But the percentage recommended by the Bank of Portugal is that it does not exceed 35%, that is, one third of the income earned by the household. The goal of not having a very high effort rate is to avoid default situations with the bank, and for families not to become indebted.

In the current inflation context, where families have had even more difficulty paying their home loan installments, exceptional measures have been implemented. At the end of 2022, a decree-law was launched to regulate the following: when one of the following situations is verified in a home loan contract - the debt-to-income ratio exceeded 50%, the debt-to-income ratio increased by at least 5 percentage points exceeding 36%, or the debt-to-income ratio increased beyond what the Bank of Portugal stress test predicts, also exceeding 36%, banks are required to renegotiate the loans so that customers can maintain their financing.

What is the importance of calculating the effort rate?

The effort rate is calculated by banks during a credit request. The purpose is for banks to analyze if the proposal is feasible and if they can proceed with the loan without the risk of customers defaulting.

Therefore, it is a way for the banking institution to safeguard itself and ensure that the client is able to take on this new burden. Ultimately, through the effort rate, it can understand the portion that this credit will occupy in the monthly budget, and with what available income remains for variable expenses and for savings.

Even if you are still in the process of considering it, as you do not know if you will be able to support the housing credit, you can proceed with the request to the banks. Therefore, by calculating your effort rate, it is possible to understand if it is an expense that you can include in your budget or not.

This calculation depends, of course, on the value of the property you intend to buy and the conditions of the credit, factors that will impact the monthly installment to pay. The credit conditions will depend on the bank you choose, so it is important to obtain several proposals. For this, you can use a credit intermediary, who mediates the entire process between you and the banks.

What distinguishes the effort rate from the DSTI?

In addition to the effort rate, banks also calculate another indicator called Debt Service-to-Income (DSTI). DSTI represents the level of financial effort of a borrower associated with debt repayment.

The objective is to analyze the risk of a client facing the probability of defaulting on credit settlement. But despite being crucial, banks take other factors into account, such as the financial assets of the borrower, guarantors, and the burdens of other regular expenses, which also influence the payment of monthly installments of the loan.

The Bank of Portugal (BP) imposes that the DSTI does not exceed 50%, with the following exceptions:

  • Borrowers with DTI up to 60% may be granted up to 10% of the total amount of credits granted by each bank;
  • Or up to 5% of the total amount of credits granted by each bank.

Although there are limits to the DSTI imposed by the CB, banking institutions consider a broader set of indicators. Therefore, the CB allows, in some cases, exceptions that exceed the limits (which, however, must be justified by banks). So, as long as it is applied judiciously, the CB grants flexibility to the limits applied to this indicator.

How is the effort rate calculated?

To calculate the effort rate, it is necessary to take into account the values ​​you receive as income and pay as installments. This is because it is calculated through the following formula:

(Credit installments/Monthly income) x 100

In credit installments, you should take into account the various monthly payments you make to creditors, such as housing credit, car loans, personal loans, or credit cards.

And within the monthly earnings received, it includes the net salary (in the case of being a worker), rents received (if you own leased properties), pensions or other fixed incomes, as long as declared in IRS.

It is important to note that, according to the Bank of Portugal, the following recommendations for the effort rate:

40%: Very high

35 to 40%: High

30% and < 34%: Ideal

=<30%: Maximum ideal

Practical example

João earns a net monthly salary of 1,200 euros and Carla earns a net monthly salary of 1,600 euros, and with rents they still obtain a value of 1,000 euros. Therefore, the total income that João and Carla receive per month is 3,800 euros.

As for loan installments, the couple has a car loan for which they pay 200 euros per month. They now intend to contract a housing loan, for which they would pay a desired installment of 1,100 euros. In addition, with monthly expenses, João and Carla spend 400 euros on food, 30 euros on transportation, 60 euros on clothing, 42 euros on insurance, 30 euros on energy, 18 euros on water, and 45 euros on communication services (625 euros on monthly expenses).

So, the couple's effort rate must be calculated as follows:

(1,500/3,800) x 100 = 34%

In other words, João and Carla have an effort rate equivalent to 34% and a DSTI of 68%, considering both loan installments. According to the Bank of Portugal, the effort rate is slightly high, as is the DSTI. Therefore, the new loan may or may not be approved by the bank, depending on other indicators to be evaluated. In these cases, it is recommended to try to lower the effort rate and the DSTI, finding some savings strategies, so that you can secure your home loan.

How to have a lower effort rate?

If you have a high effort rate, you can choose some paths to help lower this parameter in order to apply for credit.

First, start by reorganizing your monthly budget: analyze fixed expenses, as well as variable ones, and try to understand which expenses you can cut. If you have the possibility, try to amortize acquired credits, avoid using credit cards, and look for the best conditions for the new credit you want to contract.

Afterwards, ask the bank to renegotiate the terms of the credit you have already acquired. It is possible to negotiate with the bank the interest rates, the repayment term, among other conditions that can reduce the monthly installment you pay.

If you are not satisfied with the new conditions that the bank proposes for any credit, you can always transfer the credit to another institution that can offer you more favorable conditions.

You can also choose consolidated credit, an option that allows you to combine several credits, paying a single installment for all. This type of credit usually has more attractive interest rates and longer terms, which allows you to pay significantly less for multiple credits. Thus gaining a monthly break and reducing your effort rate.

Both renegotiation, transfer and consolidation of credits are options that can be done through the help of a credit intermediary, such as Poupança no Minuto. A credit intermediary handles all the paperwork for the client, mediating with the bank. In other words, it is an entity that guides you through a process, informing and helping you to obtain the best conditions for your case. It is a free service, which you can learn more about here.

Achieving a lower effort rate can make it easier for you to access a home loan, as well as build savings. This way, you can maintain a balanced monthly budget without having to do a financial gymnastics to make it through the month without losses. [link to website]


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