Read what you need to be aware of when buying a house or apartment. We've gathered good advice on how to calculate how much house you can afford.
If you're considering buying a house or apartment, one of the first things you should get a handle on is how much home you can actually afford. Read on for good advice on what to be aware of when buying property, and how to calculate how much you can afford. Also find out what impact your gældsfaktor (debt-to-income factor) has on your borrowing options.
When you start looking into your future home, one of the typical questions that comes up is: How much can I borrow, and therefore, how much house can I afford? Fortunately, you can quickly get an overview of this with a bit of simple math.
The bank looks at your financial lifestyle
It can be a good idea to start by getting an overview of your everyday finances. Because when you go to the bank, you can count on them wanting to see your budget. So the better prepared you are, having calculated all your fixed expenses, the closer you are to your future new home. Alternatively, you can use independent buyer's advisory services to gather offers from different banks.
Typically, the bank has two methods for calculating whether you can afford to buy a new home: the income method or the housing-cost method. More on these later — first it's important to understand how your personal finances are assessed in relation to, among other things, the lending rules.
All loans taken out with the bank carry a risk, and that's why banks and mortgage credit institutions carry out a risk assessment. The risk assessment is based on a range of factors and gives an indication of whether the loan can be repaid.
Some of the factors banks look at when assessing what you can afford to buy a house for are.
Read more about home loans and loan advice related to buying property.
Your rådighedsbeløb (disposable income) and gældsfaktor (debt-to-income factor) affect your loan size. The Danish FSA (Finanstilsynet) has issued guidance to banks stating that a couple with two children should have a disposable income of 13,500 kr. or more once all fixed costs have been paid. Some of the fixed costs could include:
- Home loans
- Property taxes and insurance
- Electricity, heating, water and waste disposal
- Car repayments
- Childcare places
- License fees, internet and phone.
- Debt-to-income factor
The debt-to-income factor is a huge indicator of whether you can borrow from the bank or not. It reflects how much debt your household carries, and it's decisive when the bank assesses whether it will lend you money for a home purchase.
So once you've decided to buy a home, you shouldn't start by asking, "How much house can I afford?" In fact, you should start with the question: "How big is my debt-to-income factor?"
To calculate your debt-to-income factor, you add up all your loan and debt items and then divide by the household's income before tax.
As a general rule, your debt-to-income factor must not exceed 3.5 times the household's total annual income before tax. The lower your debt, the greater your chances of the bank granting you a home loan.
Read more about what a home loan is, and how our advisors at Bomae can secure you the most favourable loan.
Payment history also has an influence. Finally, the bank also assesses your payment history. If you're constantly behind on payments or constantly overdrawn, unfortunately that doesn't earn you many stars in the book, and it can suggest that you struggle to keep your agreements, for example with the bank.
The how-much-house-can-I-afford formula
Once you have an overview of your finances and debt-to-income factor, you can start calculating what you can borrow for your home purchase. This also gives you the answer to your original question, namely: "How much home can I afford?"
Danske Bank's housing calculator is an okay tool if you just want a quick overview. However, it's far from accurate, so it can pay off better to do the calculation yourself rather than using various housing calculators online.
Common to both calculation methods is that you must have saved up at least 5% of the purchase price for an upcoming down payment.
The income method - how much can I borrow. Loan size is typically one of the first things people consider when they've decided to buy a home. Here you take the household's total annual income before tax, multiply by 3.5, and add total assets. That gives you an approximate figure for how much you can borrow. The calculation looks like this:
Family's total annual income: 960,000 kr. * 3.5 + 200,000 in savings = 3,560,000 kr. you can buy a house for. Remember, this is roughly how much debt you may carry, so if you have debt from, for example, a car or an SU (student) loan, this must be deducted from the above amount.
If you wish to buy for more than 3.5 times your annual salary, your down payment typically increases too.
The rule of thumb here is:
Debt-to-income factor 3 = 5% down payment + costs. Debt-to-income factor 4 = 10% down payment + costs. Debt-to-income factor 5 = 25% down payment + costs.
The housing-cost method - how much house can I afford. If you're going to use the housing-cost method, you need a tight personal budget. To be able to use this calculation method, you must be able to demonstrate to the bank that you live by your budget down to almost the last øre.
With this method, you find the amount you estimate you can afford to spend on housing costs and multiply it by 165.
So, if we assume you want to spend 15,000 kr. a month on housing costs, it would look like this: 15,000 kr. * 165 = 2,475,000 kr. is the amount you can afford to buy a home for.
On paper, it may not sound complicated to calculate how much you can afford to buy a house or apartment for. But the reality is that there are often forgotten or unforeseen expenses, which mean that your real disposable income is somewhat lower than you think. Very few people can remember all their expenses off the top of their head.
So when you want to get an overview of your finances, we recommend that you sit down with someone who can help you see where your money goes. The best option would be to bring in an independent financial advisor, as they can review your finances systematically and suggest changes you can make to, for example, save up for a down payment. But a friend or family member who is good with numbers and whom you trust can also do the job.
Frequently asked questions. Is there a difference between borrowing for an owner-occupied home versus an andelsbolig (housing co-operative share)? Yes, there is. A couple of examples: you can borrow a much higher amount for an owner-occupied home, and you also have the option of taking out a realkreditlån (mortgage credit loan), which is cheaper and comes with a fixed interest rate compared to a bank loan for an andelsbolig. On the other hand, you don't need to borrow as large an amount when buying an andelsbolig, and an andelsbolig purchase is also cheaper because there's less paperwork = fewer costs. Read about the costs of buying a home.
Which expenses should be counted when calculating disposable income?
All of them! Every income and expense should be included in your budget, so you get an accurate disposable income figure. Many people forget to include smaller recurring expenses, which can add up to a larger amount. Expenses such as public transport, laundry, medicine, clothing and various subscriptions for, for example, fitness or streaming services should not be dismissed as insignificant, as they ultimately affect how much you can borrow for your home purchase. Learn more about disposable income here.
Where can I get help buying a house?
We strongly recommend that you get help from a financial advisor specialising in property transactions when applying for a home loan. Banks also offer advice in connection with buying a home, but remember that they run a business. So when they offer you a loan, they don't do it out of the goodness of their hearts, but based on how much money they can make from you over the loan period. If you want to be sure of getting as favourable and transparent a loan as possible, you need an independent third party by your side. Read more about our buyer's advisory service here.
How does my debt-to-income factor affect my borrowing options?
The higher your debt-to-income factor, the higher the risk the bank sees in lending you money. If your debt-to-income factor is higher than 4, the bank will assess that you have too much debt for them to lend you money. As mentioned, the bank is a business, so when they lend out money, they want to get it back — plus a bit extra. So if you already have a high level of debt, the bank will take that as a sign that there's a high probability you won't be able to repay the loan. If you want a clear and realistic answer to what you can borrow for a home purchase, you should get financial advice.
Fill out the contact form so we can have a chat about how we can help you with buying and financing your home.
