Effort Rate: What does it mean in the real estate sector?

Buying a house can be a complex, meticulous and detailed process. It involves several phases, through which various questions and doubts can invade our minds. One of these is usually related to the Effort Rate - a term always presents in the rules for buying a property.

But why is the Effort Rate so important? Calculating this rate is one of the first actions to be taken by the bank(s), as it will help determine whether they will grant a mortgage to individuals looking to buy a house. This is why some documentation is always requested at the beginning of the process, such as IRS receipts and pay slips.

This documentation is very relevant, as it will help to calculate the Effort Rate, which is calculated as follows:

Monthly Credit Expenses / Monthly Income x 100

Monthly Credit Expenses correspond to other existing credits (such as personal loans, car loans, etc.), while Monthly Income corresponds, for example, to salary.

It is important to note that, in Portugal, it is recommended that the Effort Rate be up to 30%, while the Bank of Portugal recommends that the Effort Rate never exceed 50%.

In practice, how is the Effort Rate calculated?

In a practical example, let's say that Individual A wants to buy a house. He has a net salary of €2000 and a car loan with an installment of €250. His Effort Rate will be calculated as follows:

250/2000x100 = 12,50%

This means that Individual A has an Effort Rate that is bearable in relation to the costs he must bear.

At Urbibarra - Real Estate Developer we always try to accompany our clients in this process, helping to clarify all questions that may arise. Discover our real estate offer and share all your doubts with us