Mortgage loan: how far can you go?

With the high level of housing prices in Luxembourg, what percentage of your income can you reasonably allocate to repaying a mortgage loan? What criteria are analysed by banks when granting financing, and which elements should you take into account to define your property budget? myLIFE gives you a few pointers to help you see things more clearly.*

Repaying a mortgage loan occupies a very important place in a household’s budget. This is all the more true in Luxembourg, where housing prices are particularly high. According to the Housing Observatory, in 2023 borrowers devoted on average 36.8% of their income solely to repaying their mortgage loan. A burden which very often constitutes the first expenditure item for households. But at an identical percentage, this can lead to very different consequences depending on the resources and obligations of each household.

In this context, how can you define the reasonable share of your resources to devote to it? To answer this question, it is useful to understand the assessment criteria applied by banks beyond the value of the property to be financed, before considering your own priorities.

The criteria analysed to grant a mortgage loan

Before granting you a mortgage loan, the bank will study your profile in order to determine the amount you can repay each month without endangering your budget and your ability to manage your other recurring expenses. To do this, it will examine several elements.

> Your income

The bank needs to ensure that your financial resources are sufficient to guarantee the payment of your monthly instalments over time. It will therefore check your professional situation (permanent contract, fixedterm contract, selfemployed worker, etc.), your seniority, the amount of your income (salaries, nonsalaried income, family allowances, alimony payments, etc.), but also their stability over time.

> The composition of your household

Single, in a relationship, family with children: the number of people in your household directly impacts your living expenses and, consequently, your ability to repay a loan.

Traditionally, a debt ratio around 33–35% has long been considered a ceiling in Luxembourg, but each case is assessed individually

> Your debt ratio

If existing loans (personal loan, car loan, leasing, etc.) are too numerous or too substantial, your ability to pay your new instalments will be limited. The bank will measure the ratio between your expenses and your income to assess your debt ratio and identify the share of your income devoted to repaying your debts. The lower the ratio, the easier it will be to repay new monthly instalments linked to a mortgage loan. Conversely, a high ratio may indicate difficulties in meeting additional payments without endangering your budget.

• • Good to know: traditionally, a debt ratio around 33–35% has long been considered a ceiling in Luxembourg, but each case is assessed individually. Other elements, such as income stability or savings capacity, are taken into account by the bank and adjust this limit. This is why the debt ratio is no longer the only element considered, as banks today focus more on the “remaining disposable income”.

> The “remaining disposable income”

One of the determining criteria for the bank nowadays is what is called the “remaining disposable income”. This is the money you have left each month after paying your loans, expenses and fixed costs (water, energy, insurance, etc.). It measures your capacity to cover current expenses (food, clothing, transport, leisure, etc.) and must be sufficiently high to allow you to maintain a certain quality of life. Thus, two households with a similar debt ratio may have very different levels of remaining disposable income depending on their income level. This is one of the reasons why each situation must be considered individually.

Personal criteria to take into account before borrowing

On your side, it is important to consider additional specific criteria such as your lifestyle, your future projects and your savings. While repaying your monthly instalments may require some effort, it must not prevent you from achieving your personal projects or facing unforeseen expenses. Being at the maximum of your repayment capacity without any emergency savings can prove very problematic at the slightest unexpected event.

> Your lifestyle

Take the time to analyse your lifestyle and project yourself into the future. Whether you tend to spend a lot or closely monitor your budget, ask yourself whether repaying a loan can realistically fit into your consumption habits without too much difficulty. A loan considered “acceptable” by a bank may become uncomfortable if it forces you to live for years a lifestyle that does not suit you.

> Your future projects

The repayment of a loan must not block the achievement of other longterm projects. Keep in mind the possible developments that could impact the share of income available for paying your instalments: the arrival of a child, a job change, the purchase of a new vehicle, travel, etc. Think about maintaining a margin for manoeuvre to adapt your projects. The repayment of the loan must not block your other aspirations. Anticipating these changes allows you to preserve the necessary flexibility to live your projects fully and knowingly.

> Your savings

Emergency savings help you keep peace of mind in the event of an unexpected event and allow you to cope with unforeseen expenses (health, breakdowns, repairs, etc.). Even if you need to reduce the amount saved, your monthly payments must not prevent you from continuing to put money aside.

• • Good to know: the costs linked to the maintenance of your future home add to your usual expenses: property taxes, home insurance, maintenance or repair work, furnishing, equipment, etc. They deserve to be considered from the outset in your overall budget.

It is important to find your own balance between repaying your debts and your daily life, without forgetting to keep flexibility for unexpected events or a change in your family situation.

The characteristics of your mortgage loan will also influence the share of income you can devote to housing.

The loan parameters that influence your housing budget

The characteristics of your mortgage loan will also influence the share of income you can devote to housing. Make sure to consider them when establishing your budget.

> The loan term

The longer a loan extends over time, the more expensive it becomes. As the monthly payments are lower, the outstanding capital decreases more slowly and generates interest over a longer period. In Luxembourg, common loan terms for a mortgage loan are generally between 20 and 30 years, sometimes 35 years. They may vary depending on your age, the amount borrowed, your income level or the financial institution.

> The interest rate

The choice of a fixed, variable or revisable interest rate also influences the amount to be repaid and may lead to an increase in instalments over time (for variable or revisable rates). Thus, the higher the rate, the more expensive the loan. The interest rate depends on various factors, including interbank market developments, the duration of your loan or the risk the bank associates with your profile. Having regular income, impeccable account management, several banking products in the same institution or a good relationship with your banker may work in your favour. The interest rate is among the elements that may, in certain cases, be discussed with the bank.

> Insurance

Your monthly instalments will also depend on the amount of your insurance. Although it is not legally compulsory in Luxembourg, credit protection insurance is generally required by the bank. It secures the loan and covers repayment of the instalments in case of incapacity or death. It is calculated on a casebycase basis, depending on the loan amount, its characteristics, but also based on criteria linked to your situation and condition.

> The personal contribution

Finally, the personal contribution directly influences the amount of your instalments and sometimes even your interest rate, as it impacts the bank’s assessment of the risk of granting you a loan. The higher your initial contribution, the lower the loan amount and the lower the interest payable. In Luxembourg, it is generally recommended to have a contribution between 10% and 20% of the property price.

• • Good to know: in order to define your budget and estimate the amount that you will have to repay each month, you can use the simulators available on bank websites.

What percentage of your income should be allocated to your mortgage loan?

The share of income devoted to your housing costs varies depending on your personal situation. There may be a difference between what the bank agrees to lend you and what it is reasonable to borrow according to your own tolerance threshold. In short, there is no ideal percentage: everything depends on your profile and what you have left to live on once your expenses are paid. While allocating more than 35% of your monthly income to loan repayment is not necessarily restrictive for a household with high income and a stable situation, it is recommended to aim for around 30% for a household with more limited resources or higher expenses. This principle helps maintain a margin for manoeuvre, even if the Luxembourg market context limits possibilities for some.

• • Good to know: the Luxembourg government offers tax measures and financial assistance to facilitate access to property: Bëllegen Akt, home ownership grant, etc. Find out which ones you may be entitled to in order to lighten your housing budget.

Illustrative example

Let us take an example to better understand how to determine a reasonable percentage of income to devote to a mortgage loan.**

Household situation:

• • Couple without children
  • Combined net monthly income: €7,500
  • Existing loans: €450/month
  • Other fixed expenses (insurance, energy, water, telecoms, etc.): €1,300/month

– 1 – Debt ratio

In Luxembourg, credit institutions generally consider that a debt ratio should not exceed around 35% of income, subject to the analysis of other criteria.

> Maximum credit expense limit:

35% × €7,500 = €2,625/month

> Theoretical maximum instalments still available for the mortgage loan:

€2,625 – €450 = €2,175/month

This amount may be revised upward or downward depending on the other criteria analysed: remaining disposable income, income stability, savings, etc.

– 2 – Remaining disposable income

It must allow covering current expenses, continuing to save and handling unforeseen events.

> Remaining disposable income = net income – (loan instalments + other fixed expenses)

€7,500 – (€2,625 + €1,300) = €3,575

– 3 – Share of income devoted to housing

> Percentage of income devoted to housing = (loan instalment / net income) × 100

(€2,175 / €7,500) × 100 = 29% of income

In this example, devoting around 29% of income to mortgage repayment may, in practice, be considered acceptable for the bank and reasonable for the couple, since the rate remains below 30% and the remaining disposable income remains comfortable.

Finding a balance between the bank’s assessment criteria and the household’s financial comfort is essential.

In practice, the percentage that can reasonably be devoted to repaying a mortgage loan always depends on the borrower’s profile, income and remaining disposable income. Do not hesitate to consult your banker to assess your situation and define the amount you can reasonably borrow. They will help you make the decision best suited to your profile, your preferences and your lifestyle.

* Content translated from French by the BIL GPT AI tool

** This example only aims to illustrate a method of reasoning. It is intentionally simplified and the figures are rounded for easier reading.