Borrowing capacity is the maximum amount a lender will let you borrow based on your income, existing debts, and the loan terms. Understanding how banks calculate this figure helps you set realistic property budgets and improve your chances of mortgage approval.
The two main approaches
Lenders use one or both of the following methods:
1. Debt-to-income ratio (DTI)
The DTI ratio compares your total monthly debt payments (including the proposed mortgage) to your gross monthly income.
DTI = (Total Monthly Debt Payments / Gross Monthly Income) x 100
Most lenders cap DTI at 33% to 35% in France, 36% to 43% in the US, and apply affordability stress tests in the UK.
2. Residual income
Residual income is what remains from your net income after all fixed expenses and the proposed mortgage payment. Lenders verify that you have enough left to cover living costs.
Residual Income = Net Monthly Income - Existing Debts - Proposed Mortgage Payment - Living Costs
The borrowing capacity formula
Maximum Loan = (Monthly Income x Maximum DTI Ratio - Existing Monthly Debts) x Loan Term in Months x Adjustment Factor
In practice, lenders use amortisation tables. A simplified approach:
Maximum Monthly Payment = Gross Monthly Income x Max DTI - Existing Monthly Debts
Then use a loan payment formula to convert this monthly payment into a maximum loan amount based on the interest rate and term.
Worked example
| Parameter | Value |
|---|---|
| Gross annual income | EUR 60,000 |
| Gross monthly income | EUR 5,000 |
| Maximum DTI | 35% |
| Existing monthly debts | EUR 200 (car loan) |
| Interest rate | 3.5% |
| Loan term | 25 years |
Maximum monthly mortgage payment = (EUR 5,000 x 35%) - EUR 200 = EUR 1,550
Using a standard amortisation calculation at 3.5% over 25 years, a monthly payment of EUR 1,550 supports a loan of approximately EUR 310,000.
How interest rates affect borrowing capacity
The interest rate has a dramatic impact on how much you can borrow for the same monthly payment.
| Interest rate | Max loan (EUR 1,550/month, 25 years) |
|---|---|
| 2.0% | EUR 366,000 |
| 3.0% | EUR 328,000 |
| 3.5% | EUR 310,000 |
| 4.0% | EUR 294,000 |
| 5.0% | EUR 264,000 |
| 6.0% | EUR 238,000 |
A 1 percentage point increase in rates reduces borrowing capacity by roughly 8 to 10%.
How loan term affects capacity
| Loan term | Max loan (EUR 1,550/month, 3.5%) |
|---|---|
| 15 years | EUR 212,000 |
| 20 years | EUR 264,000 |
| 25 years | EUR 310,000 |
| 30 years | EUR 345,000 |
Longer terms increase borrowing capacity but result in significantly more interest paid over the life of the loan. A 30-year loan at 3.5% costs roughly 40% more in total interest than a 20-year loan.
Country-specific rules
United States
US lenders typically use two DTI ratios: the front-end ratio (housing costs only, max 28%) and the back-end ratio (all debts, max 36-43%). FHA loans allow up to 43% back-end DTI, while conventional loans prefer 36%.
United Kingdom
UK lenders apply an affordability stress test, assessing whether you could still afford payments if interest rates rose by 1 to 3 percentage points. Most lenders offer 4 to 4.5 times annual income, with some going up to 5.5 times for high earners.
France
The Haut Conseil de Stabilite Financiere (HCSF) limits DTI to 35% (including insurance) and loan terms to 25 years (27 years for new-build with a deferred start). These are binding rules, not guidelines.
Germany
German lenders focus on residual income and typically expect borrowers to contribute at least 20% equity. They apply conservative income assessments and stress test at higher rates.
How to increase your borrowing capacity
- Pay down existing debts. Eliminating a EUR 300 monthly car payment frees up capacity for an additional EUR 60,000 or more in mortgage borrowing.
- Increase your income. Demonstrable salary increases, bonuses, or a second income directly boost capacity. Lenders typically want 2-3 years of history for variable income.
- Extend the loan term. Moving from 20 to 25 years increases capacity by approximately 17%, though total interest costs rise.
- Add a co-borrower. A second borrower's income is included in the calculation, potentially doubling capacity.
- Save a larger deposit. A bigger deposit reduces the loan amount needed and may unlock better interest rates.