How does the effort rate work in Mortgage Loans?

The effort rate is one of the most important factors to take into account when applying for a mortgage in Portugal. This rate helps banks assess the customer's financial capacity to support the monthly payment of the loan, taking into account their income and expenses. In this article, we explain what the effort rate is, how it is calculated, and how important it is in granting a mortgage.

1. What is the Effort Rate?

The effort rate is a percentage that represents the part of a household's income that is allocated to the payment of loan charges, including housing credit. In practical terms, it shows the financial weight that credit will have on your monthly finances.

2. How is the Effort Rate Calculated?

The calculation of the effort rate is simple and is based on the following formula:

Effort Rate = (Monthly Loan Charges ÷ Monthly Net Income) ×100

• Monthly Loan Charges: Includes the monthly amount of the mortgage installment and any other personal or car loan that the customer has.
• Net Monthly Income: It is the total monthly income of the household after taxes and deductions.

For example, if a couple has a monthly net income of €2,500 and their monthly credit charges add up to €750, the effort rate would be:

(750 ÷ 2500) × 100 = 30%

3. What is the Ideal Effort Rate?

Although it may vary from bank to bank, the effort rate recommended by financial institutions in Portugal is generally between 30% and 35%. This means that mortgage installments and other loans should not exceed about a third of net monthly income.

If the effort rate is higher than this range, the bank may consider that the risk of default is high and, therefore, may refuse the loan or offer less favorable conditions, such as higher interest rates or shorter payment terms.

4. What Happens if the Effort Rate Is High?

A high effort rate means that a significant part of your income will be used to pay off loans, which can compromise your ability to manage other essential expenses, such as food, health or education.

If the effort rate is higher than 40%, banks consider that the risk of over-indebtedness is high. In these cases, it may be advisable to rethink the amount of credit requested, the amount of the initial down payment, or renegotiate other debts to reduce monthly charges.

5. How to Reduce the Effort Rate?

There are several ways to reduce your effort rate and improve your chances of getting a mortgage:

• Increase the Initial Down Payment Amount: The higher the initial down payment, the lower the amount financed by the bank, which reduces the monthly installment and, consequently, the effort rate.
• Extend the Loan Term: Extending the credit term can lower the amount of the monthly installment, but be careful, this also increases the interest paid over time.
• Renegotiate Other Debts: If you have other credits (personal or automobile), you can try to renegotiate the conditions or consolidate the debts into a single credit with better conditions.
• Increase Income: This solution is not always feasible, but increasing household income (for example, through supplementary income or a new job) can help lower the effort rate.

6. Importance of the Effort Rate in Mortgage Loans

The effort rate is not just a requirement of the bank; It is also an important tool for the real estate buyers themselves. Having an adequate effort rate ensures that you will have greater financial stability and that you will be able to support the credit installments without compromising your lifestyle or other obligations.

Banks use the effort rate as a risk assessment criterion, ensuring that customers are able to meet financial commitments. Keeping this rate within the recommended limits is essential for good financial management.

Conclusion

The effort rate is an essential indicator that allows you to assess your ability to take out a mortgage without compromising your financial health. To ensure a smooth and responsible buying process, it is important to take this factor into account and opt for a loan that fits your financial reality, without overloading your family budget.

If you're thinking of buying a house and need help assessing your effort rate, consult a financial expert or your bank for personalized advice.