Calculate your borrowing capacity step by step

How to calculate your borrowing capacity step by step

To calculate your borrowing capacity, divide your total monthly debt repayments by your net income and multiply the result by 100. As a general guideline, your debts should not exceed approximately 35%–40% of your monthly income.

This calculation helps you understand what monthly payment you may be able to afford before applying for a mortgage, personal loan, or other type of financing. The goal is not to borrow up to the maximum limit, but to leave enough room to cover expenses, save, and deal with unexpected costs.

What is borrowing capacity?

Borrowing capacity is the percentage of your net income that goes toward monthly repayments on loans, mortgages, credit cards, and other financial obligations.

As a general guideline, it is recommended that your total monthly repayments do not exceed approximately 35%–40% of your net income. The appropriate percentage may be lower if you have high expenses or variable income.

For example, if you receive €2,000 net per month, 40% would be €800. This amount should include both any new financing and the repayments you are already making.

Formula for calculating your borrowing capacity

To find out what percentage of your income you already spend on debt repayments, you need two figures:

Monthly net income: the amount of money you actually receive each month.

Monthly debt repayments: the total amount you pay each month toward loans, credit cards, and other financing.

The formula is:

Monthly debt repayments ÷ monthly net income × 100

For example:

Net income: €2,200
Car payment: €220
Personal loan: €110
Total monthly repayments: €330

The calculation is:

330 ÷ 2,200 = 0.15
0.15 × 100 = 15%

In this case, the person currently spends 15% of their income on debt repayments.

How to calculate my borrowing capacity step by step

Add up your monthly net income

The first step in calculating your borrowing capacity is to identify the regular income you receive after taxes and social security contributions.

You can include:

Monthly salary.
Regular self-employed income.
Stable pensions or benefits.
Rental income.
Other regular and verifiable income.

It is best not to include bonuses, one-off jobs, or income that is unlikely to be repeated.

If your income varies, use the average from the last six or twelve months. You can also use your lower-income months as a reference to obtain a more conservative estimate.

1 - Identify all your monthly debt repayments

Next, add up all the financial obligations you pay each month. It is important not to consider only your largest debts.

You should include:

Mortgages.
Personal loans.
Vehicle financing.
Credit cards.
Deferred purchases.
Instalment payments.
Other active lines of credit.

Several small repayments can significantly reduce your available borrowing capacity when considered together.

2 - Calculate the percentage of income spent on debt

Divide your total monthly debt repayments by your net income and multiply the result by 100.

For example:

Net income: €2,500
Monthly debt repayments: €500
Calculation: 500 ÷ 2,500 × 100
Current debt ratio: 20%

This person spends 20% of their income on debt repayments. Although there is still room before reaching 40%, this does not mean they should use all of it.

3 - Calculate your estimated available capacity

To estimate the additional monthly payment you could potentially afford within the 40% guideline, follow these steps:

Multiply your net income by 0.40.
Subtract the monthly debt repayments you already make.
The result is your theoretical capacity for additional debt.

Using the previous example:

2,500 × 0.40 = €1,000
1,000 − 500 = €500

The estimated maximum new monthly payment would be €500. However, before taking on this amount, you should consider your actual household expenses.

4 - Check your actual budget

Rent, food, utilities, and transport are not debts, but they directly affect your ability to make repayments.

Before accepting a new monthly payment, check whether you will still be able to:

Cover all your regular expenses.
Continue putting money aside for savings.
Deal with repairs and unexpected expenses.
Maintain some financial flexibility at the end of each month.

The mathematical limit does not always represent a comfortable and sustainable monthly payment.

Practical example of how to calculate borrowing capacity

Suppose a household receives €3,200 in net monthly income and has two active financing commitments.

Their figures are:

Net income: €3,200
Car loan: €250
Other financing: €150
Total monthly repayments: €400

First, calculate the current debt ratio:

400 ÷ 3,200 × 100 = 12.5%

Next, calculate the guideline limit of 40%:

3,200 × 0.40 = €1,280

Finally, subtract the existing monthly repayments:

1,280 − 400 = €880

The theoretical capacity for a new monthly payment would be €880. However, if the household has high expenses, children, or limited savings, taking on this amount could be risky.

Borrowing capacity for a mortgage

Borrowing capacity for a mortgage is calculated using the same formula, but it requires a long-term perspective. A mortgage can last for several decades, during which your personal and financial circumstances may change.

For an initial estimate:

Calculate 35%–40% of your net income.
Subtract the repayments on your existing debts.
Check whether the future mortgage payment fits within the remaining amount.
Review how much money you will have left after covering your regular expenses.

For example:

Net income: €2,500
40% limit: €1,000
Other loan repayments: €300
Theoretical capacity for the mortgage: €700

Staying within this percentage does not guarantee that a bank will approve your application. The lender may also assess your employment stability, savings, property value, and financial history.

The repayment term affects both the monthly payment and the cost

Extending the mortgage term reduces the monthly payment, but it also means paying interest for longer. A lower monthly payment can ultimately result in a significantly higher total cost.

A shorter term reduces the total interest paid but requires higher monthly payments. The right choice should balance monthly affordability with the overall cost of financing.

Simulate less favourable scenarios

You should not make your calculations based only on your current situation. A reduction in income or an increase in expenses can significantly affect your budget.

Before signing, consider whether you could continue making your payments in situations such as:

An increase in your mortgage payment.
A temporary reduction in income.
An increase in household expenses.
A major home repair.
A period of unemployment.

Your borrowing capacity should allow you to manage both your current circumstances and potential future changes.

What factors can reduce your actual borrowing capacity?

The formula provides an initial reference, but it does not reflect your entire financial situation. Two people with the same income and debt levels may have very different borrowing capacities.

Factors that can influence your actual capacity include household expenses, employment stability, available savings, the number of dependants, and the consistency of your income.

The remaining term of your existing debts also matters. A monthly payment that ends in two months does not have the same impact as one that will continue for several years.

Common mistakes when calculating borrowing capacity

Some of the most common mistakes include:

Using gross income: the calculation should be based on net income.
Forgetting smaller financing commitments: credit cards and deferred purchases also reduce your available capacity.
Treating 40% as a target: it is a guideline, not an amount you should aim to reach.
Ignoring everyday expenses: rent, food, and utilities affect your actual ability to repay.
Using your best month as a reference: if your income varies, it is better to use a conservative average.
Not leaving room for savings: a new monthly payment should not prevent you from building an emergency fund.
Looking only at the monthly payment: you should also consider the repayment term, interest, and total cost.
Failing to consider future changes: your income and expenses may change during the repayment period.

How to increase your borrowing capacity

Reducing or paying off smaller debts can free up part of your monthly budget. In some situations, it may be better to wait a few months before applying for new financing.

You can also:

Avoid taking on new deferred-payment purchases.
Reduce outstanding credit card balances.
Review recurring expenses and subscriptions.
Build an emergency fund.
Increase your savings before applying for a mortgage.
Apply for a lower financing amount.

Extending the repayment term can also reduce the monthly payment, but it increases the total interest cost. For this reason, you should evaluate the financing as a whole rather than focusing only on the monthly payment.

Verified data for a clearer picture of your financial situation

Bank transaction data can provide a more accurate view of your income, expenses, and financial habits. Through Open Banking, CreditCheck uses verified data to assess your situation and simulate different amounts and repayment terms before you apply for financing.

A guideline for making decisions, not a target

Calculating your borrowing capacity helps you understand what monthly payment you may be able to afford, but the resulting limit should not be treated as a target. Sustainable financing should allow you to cover your expenses, save money, and manage unexpected costs without compromising your financial stability.