To assess your borrowing capacity, including insurance premiums, start with the amount you plan to allocate each month to the new loan, including insurance. Also gather the monthly repayments on your existing loans and the associated insurance premiums. You can then prepare an estimate to compare with your budget and the banks’ proposals.
This estimate helps you prepare your project: the bank also assesses your creditworthiness based on your income, savings, expenses and debts. If it accepts your application, it sends you a loan offer.
Gathering your monthly budget details
Start by listing your monthly income, then the monthly repayments for all your loans and the monthly insurance premiums associated with those loans. The debt-to-income ratio compares these repayments and premiums with your monthly income.
For the planned project, also note the desired monthly payment, the loan interest rate, the borrower insurance interest rate and the desired loan term. These factors are used to estimate your borrowing capacity.
Keep an overview of your housing expenses: mortgage repayments, borrower insurance premiums, condominium charges, electricity and heating consumption, and property tax. Gathering these helps you review your budget beyond the payments on the future loan alone.
Where should the insurance premium go?
In your table, distinguish between the loan repayment and the borrower insurance premium, then look at their combined monthly amount. Service Public defines a mortgage monthly payment as the amount paid each month to repay the loan and pay the monthly borrower insurance premium.
If you already have loans, list the repayment and associated insurance premium for each one. Then add the amounts planned for the new loan to prepare your assessment of the debt-to-income ratio. The bank must check that your debt-to-income ratio is not greater than 35 %: it corresponds to the share of your monthly income represented by all your monthly loan and loan insurance payments.
For your loan repayment budget, this check is a guide and should be distinguished from the full assessment of your application. The bank considers your financial situation when assessing your creditworthiness.
Also plan for the total project cost
Repayment capacity and the amount to be financed answer two different questions. To determine the latter, add up the price of the property or the cost of construction, along with the fees applicable to your transaction: lender’s guarantee, notary fees, loan and borrower insurance application fees, for example.
Depending on the project, other costs may apply, such as account-opening fees if your income is redirected to a new account, or a broker’s or estate agent’s fee. Separate these costs from your list of monthly repayments and premiums to keep a clear view of both budgets.
Also review your savings. You can use all or part of them to finance part of the project: this sum then constitutes your personal contribution.
Review insurance and compare offers
The bank may require borrower insurance and specify the risks that must be covered. You may nevertheless choose your insurer under the conditions set by the bank. Loan insurance can cover, among other things, death, disability or job loss.
To compare proposals, look at the annual percentage rate, or TAEG, rather than the interest rate alone. For the same amount borrowed, the TAEG allows you to compare the total cost of offers; it takes into account, among other things, the cost of borrower insurance, application fees and the cost of guarantees.
The European Standardised Information Sheet sets out the main features and repayment terms of the proposed loan. Its presentation makes it easier to compare offers and analyse their impact. For a fixed-rate loan, the offer’s repayment schedule details, for each monthly payment, the portion allocated to principal and the portion allocated to interest.
From estimation to decision
Use your records to prepare an estimate, then check the amounts and conditions in the proposals you receive. A simulation helps you explore your budget; then take time to read the documents before deciding. If the bank accepts your application, it sends you a loan offer that you can also choose to refuse.
