With recent increases in mortgage payments, there is a lot of talk about the debt-to-income ratio. We explain the importance of this concept.
With inflation on the rise, interest rates and mortgage payments increasing, the loss of purchasing power is a reality. And in families with relatively low incomes or high debt-to-income ratios, the increase in the cost of living is already putting pressure on budgets and causing an increase in over-indebtedness. That is why it is so important to know your debt-to-income ratio before making decisions, to avoid scenarios of default and greater financial difficulties. In this week's Deco Alerta article, we explain everything about this subject.
In this time of crisis, especially with the recent increases in mortgage payments, there is a lot of talk about the debt-to-income ratio. I have even heard Deco say that all families should know their debt-to-income ratio. However, I have not yet been able to clearly understand this concept. What is it and what does it mean in our daily lives?
As you rightly point out, we should all know our debt-to-income ratio, and to do so, we need to understand exactly what this ratio is.
The debt-to-income ratio is a measure of credit risk that relates the value of bank installments (mortgage payments, car loans, credit cards, personal loans) to household income.
This rate is, roughly speaking, the income that the consumer (or family) has available to cover day-to-day expenses (e.g., food, transportation and fuel, education, and leisure) after paying monthly obligations on previously contracted loans.
The debt-to-income ratio is calculated using the following formula:
Debt-to-income ratio = (Monthly financial expenses / Income) x 100
The higher the debt-to-income ratio, the greater the risk of financial difficulties arising in unforeseen circumstances, such as unemployment, illness, or divorce. Did you know that your debt-to-income ratio should not exceed 35%?
Data recently released by Deco's Financial Protection Office reveals that the effort rate for families is 78%. The average income of families who sought support from the GPF was €1,100, with total credit payments of €860. These two figures were used to calculate this effort rate, which far exceeds the maximum limit of 35%.
Source: Idealista/News