Calculate My Loan Capacity

Loan Capacity Formula:

\[ \text{Max Loan Amount} = \frac{(\text{Annual Income} \times \text{Affordability Ratio} - \text{Annual Expenses})}{(\text{Assessment Rate} / 12)} \]

Annual Income:

currency

Affordability Ratio:

decimal

Annual Expenses:

currency

Assessment Rate:

% p.a.

Max Loan Amount:

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1. What Is Loan Capacity Calculation?

Loan capacity calculation helps determine the maximum loan amount an individual can afford based on their income, expenses, and lender assessment criteria. It provides a realistic estimate of borrowing capacity while maintaining financial stability.

2. How Does The Calculator Work?

The calculator uses the loan capacity formula:

\[ \text{Max Loan Amount} = \frac{(\text{Annual Income} \times \text{Affordability Ratio} - \text{Annual Expenses})}{(\text{Assessment Rate} / 12)} \]

Where:

Annual Income — Total yearly income before taxes
Affordability Ratio — Percentage of income available for loan repayment (typically 0.3-0.4)
Annual Expenses — Total yearly financial obligations
Assessment Rate — Lender's annual interest rate used for affordability assessment

Explanation: This calculation determines how much you can borrow while maintaining a sustainable debt-to-income ratio.

3. Importance Of Loan Capacity Assessment

Details: Proper loan capacity assessment helps prevent over-borrowing, ensures loan repayments remain manageable, and maintains financial health by aligning debt with income capabilities.

4. Using The Calculator

Tips: Enter accurate annual income, choose an appropriate affordability ratio (typically 30-40%), include all annual expenses, and use the lender's assessment rate. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a typical affordability ratio?
A: Most lenders use 30-40% of gross income as the maximum amount available for debt servicing.

Q2: Why use annual expenses in the calculation?
A: Annual expenses represent existing financial commitments that reduce available income for new loan repayments.

Q3: How does assessment rate differ from actual interest rate?
A: Assessment rate is typically higher than the actual rate to provide a buffer for potential rate increases.

Q4: Should I include investment income?
A: Yes, include all stable and verifiable income sources when calculating annual income.

Q5: How often should I reassess my loan capacity?
A: Reassess whenever your financial situation changes significantly - income change, new expenses, or changing interest rates.