EFFORT RATE: WHAT IS IT AND HOW IS IT CALCULATED?

EFFORT RATE: WHAT IS IT AND HOW IS IT CALCULATED?

Before applying for financing, such as a mortgage, it is essential to understand the concept of effort rate. This financial indicator helps to assess your ability to take on new financial responsibilities and is widely used by banks to determine whether your application will be approved.

In this article, we clearly explain what the effort rate is, how to calculate it, and why it is so important in managing your budget.

WHAT IS THE EFFORT RATE?

The effort rate is the percentage of the monthly net income that is allocated to the payment of credit charges. This figure helps financial institutions assess the risk of granting credit. The lower the effort rate, the greater the perception that the customer has the financial capacity to comply with contractual obligations.

HOW TO CALCULATE THE EFFORT RATE?

The formula for calculating the effort rate is quite simple:

Effort Rate (%) = (Monthly Charges / Monthly Net Income) x 100

Monthly Charges: Sum of all ongoing credit installments (housing, car, personal, among others).

Net Monthly Income: Total monthly income after mandatory deductions (IRS, Social Security, among others).

Example:

If your total monthly charges are €600 and your net income is €2,000, your effort rate will be:

Effort Rate = (600 / 2,000) x 100 = 30%

WHAT IS THE IDEAL VALUE OF THE EFFORT RATE?

Banks consider an effort rate of up to 30% to be ideal. This figure indicates a balanced financial situation, with room to deal with unforeseen events. When the rate exceeds this threshold, the risk of default increases, and credit approval can be more difficult.

For rates between 30% and 40%, some institutions may still accept the request, depending on other factors such as professional stability and assets.

Rates above 40% are generally considered unsustainable and may result in the refusal of financing.

WHY IS IT IMPORTANT TO KNOW YOUR EFFORT RATE?

• Calculating the effort rate allows you to:
• Assess your borrowing capacity realistically;
• Prevent situations of over-indebtedness;
• Negotiate better conditions with banks;
• Plan the family budget more efficiently.

HOW TO OPTIMIZE YOUR EFFORT RATE?

If your effort rate is above ideal, consider these tips to reduce it:

Repay existing debts: Reduce or eliminate current credits before applying for new financing.

Consolidate Credits: Reorganize your credits into a single monthly payment with a lower interest rate.

Increase Yields: Consider additional sources of income to improve your effort rate calculation.

Our team of experts is ready to help you calculate and optimize your effort rate. Together, we will analyze your financial situation and find solutions that fit your needs.

Don't hesitate to contact us to make sure you're prepared to get the funding you want!