Maximum loan amount: this is how the bank calculates the credit line

Maximum loan amount, woman sitting in front of laptop and calculator, photo: Natee Meepian / stock.adobe.com

To determine the maximum loan amount, banks have developed various methods. The basis for calculating the credit line is the amount of equity, income, amount of interest and repayment as well as living expenses. With our step-by-step guide, everyone can approximate their credit limit and calculate the monthly affordable loan installment.

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Maximum loan amount: this is how the bank calculates the credit line

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Do I get a loan at all?

Am I creditworthy? This question should be asked at the outset by anyone considering buying or building a home. For the answer to this question, banks use various criteria to check creditworthiness. In addition to asking for person-specific data such as date of birth and gender, the following factors in particular influence creditworthiness:

  • Job and salaryOnly those who can show the regular, secure receipt of a salary are considered creditworthy in the eyes of the banks – a permanent employment contract is also an advantage. As a rule of thumb for the amount of salary: The monthly net income should be above the garnishment exemption limit, which in July 2021 from 1.178,59 Euro on 1.252.64 euros has been increased.
    Since the monthly income of self-employed persons and freelancers often fluctuates, banks check their annual income. The following appliesSelf-employed persons and freelancers should have two to three successful years to be considered creditworthy.
  • Existing liabilities and payment historyThe bank checks whether potential borrowers have already taken out other loans and, above all, what their payment history is like. For this purpose, credit institutions usually use the Schufa score.

Since the introduction of the Residential Mortgage Directive, banks have to check even more strictly whether consumers are creditworthy. How this affects the granting of loans in practice, you can read here.

How much money do I have available each month to pay off a real estate loan?

As part of the credit check, the bank also determines whether a borrower can afford the monthly installments of a real estate loan. It is also important for future homeowners themselves to realistically assess their own financial strength. The best way to do this is with a budget calculator that compares monthly expenses and income. In this way, the monthly disposable income that can be used to repay a loan is determined.

On the income side:

  • Net salary
  • Child benefit
  • Rental income
  • Survivor’s pension
  • Profits from investments
  • Other income

The monthly fixed costs result from:

  • Rent, which does not have to be taken into account if it is eliminated after the financing is in place.
  • Incidental housing costs (water, electricity, heating supply, etc.).)
  • Insurances (liability insurance, car insurance, etc.).)
  • Regular costs (Internet, cell phone contract, pay TV subscription, etc.).)
  • Living expenses (food, clothing, leisure, etc.) should be taken into account.)
  • Other expenses
  • Padding for extra expenses

According to real estate experts, the monthly installment for the repayment of the real estate loan should include Maximum 40 percent of net income amount. So, according to this rule, a family with 3.000 net per month a loan with a monthly installment of 1.200 euros. Of course, this statement cannot be generalized, since it always depends on the individual situation and the amount of the monthly income and fixed costs.

How much loan do I get?

In order to determine the maximum loan amount, the banks have developed three different methods, which everyone can use to determine his or her credit limit.

Method 1: Maximum loan amount considering monthly salary less deductible

If, for example, the calculation of disposable income shows that the monthly installment will not exceed 1.000, this would result in the following maximum loan amount: With an interest rate of two percent and an initial repayment of two percent, the monthly installment for a 300.000 euro loan on the same 1.000 euros. In practice, however, the credit line is usually lower than this. Because the banks also take into account that the interest rate for the follow-up financing in a few years could be higher. Therefore, they calculate with an imputed interest rate to ensure that the customer can also afford a higher loan installment after the fixed interest rate expires.

Example calculation with a maximum of 1.000 Euro monthly installment and imputed interest rate

The initial situationThe bank customer could pay a maximum of 1.000 Euro loan installment to be paid.

In the case of a loan with a ten-year fixed interest rate, interest and repayment are initially two percent each. The bank only grants a loan of 260.000 euros, although a monthly installment of 1.000 euro also requires a loan amount of 300.000 euros could be financed. The monthly installment in this example is around 870 euros. The following example calculation shows that the follow-up financing of the 300.000 loan (loan 1) would exceed the bank customer’s load limit. At five percent interest and one percent repayment, the monthly installment after ten years would be 1.175 euros:

Loan 1Loan 2
Loan amount (Euro) 300.000 260.000
Interest rate (percent) 2 2
Repayment (percent) 2 2
Monthly installment (euros) 1.000 870
Residual debt after 10 years (euros) 235.000 200.000
Connection to loan 1 Connection to loan 2
Loan amount (euros) 235.000 200.000
Interest rate (percent) 5 5
Repayment (percent) 1 1
Monthly installment (Euro) 1.175 1.000

Note: Figures rounded

At 260.000 euro loan, the residual debt after ten years amounts to around 200.000 euros. The future monthly installment of the follow-up financing at a six percent annuity is approximately 1.000 euros and is thus within the acceptable range for the bank customer.

Method 2: Maximum loan amount when considering the monthly net income

Another method that some banks use to calculate the maximum loan amount is to consider the net monthly income. Here is the rule of thumb: monthly net income times 110 gives the highest possible loan amount. Net income consists not only of net wages or salary, but also, for example, rental income, child benefit, survivors’ pensions or investment income. It is important, however, that this income flows regularly and does not fluctuate significantly. Another prerequisite is that the future borrower has a good credit rating, e.g., no negative Schufa entries.

For example, if a family of four has a net income of 3.000, this would result in a purely mathematical maximum loan amount of 330.000 euros (3.000 euros x 110). But even with this method, the following applies: In low-interest phases, banks may assume a higher annuity in their calculation in the future, so that the maximum loan amount may be lower under certain circumstances.

Method 3: Maximum loan amount based on annual income

Maximum loan amount, freelancer sitting in front of a laptop in her workshop, photo: mavoimages / stock.adobe.com

For freelancers and self-employed, some banks give less credit than for permanent employees. Photo: mavoimages / stock.adobe.com

The third method is only applicable for self-employed and freelancers. Since they have an irregular income, banks do not consider the monthly net income, but the annual net income. Britta Barlage, press officer of Interhyp, says: "In determining the maximum loan amount for the self-employed, most of our lenders consider the income of the past two to three years, whereby this is done according to different criteria. In addition, most of our lenders set a minimum period of self-employment of two years."

Some banks often only lend seven to nine times the typical annual income to self-employed persons. A freelancer who has earned an average net income of 36.36,000 over the past three years, this method would result in a loan of between.000 euros and 324.000 euros. Taking into account a higher annuity for the follow-up financing would also result in a lower maximum loan amount here.

How much equity do I need for a house?

Real estate experts advise that the Equity ratio of at least 20 percent of the real estate value should be. Equity capital is mainly bank deposits, securities, building society savings and surrender values of life insurance policies.

What is often underestimated in the costs of a real estate purchase are the ancillary purchase costs. These are essential to take into account, regardless of the method used by the bank to calculate the credit line, and should also be covered by the equity capital. Incidental purchase costs consist of land transfer tax, which is 3.5 to 6.5 percent of the purchase price depending on the state, and brokerage costs. These usually fluctuate between zero and 7.14 percent, although since 23. December 2020, the buyer principle – the shared brokerage commission – will also apply to properties for purchase. For notary and land register entry are to be planned again about one to 1.5 percent.

Where to find suitable real estate and financing offers?

Anyone who builds or buys a property commits himself for many years. The calculation should therefore not be too tight in principle, so that reserves for unforeseen and enough money for the previous lifestyle remain. As a rule of thumbA maximum of 40 percent of the monthly disposable net income should be used for the repayment of a real estate loan.

With the maximum stemmbare monthly installment, an equity ratio of at least 20 percent and a buffer can potential real estate buyers and builders Find suitable real estate and financing partners via immowelt’s budget calculator.

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