Theoretical mortgage costs: definition
Theoretical mortgage costs are a conservative estimate of the future cost of your mortgage: interest calculated at a higher rate (e.g., 4.5–5%), mandatory amortisation and maintenance costs. This calculation does not necessarily reflect your current actual payments, but a stress scenario lenders use to assess your affordability.
Using theoretical costs
The purpose of this stress test is to check that your budget could withstand a rise in rates or a change in circumstances. If the theoretical costs exceed the accepted threshold, the bank may decline the loan or require more equity. It is therefore better to anticipate these parameters before making an offer on a property.
Numerical example of theoretical costs
A buyer gets a fixed rate of 2.1% today, resulting in comfortable monthly payments. However, the bank calculates their theoretical mortgage costs using a rate of 4.8%. If, at that rate, the cost ratio exceeds 33% of their income, the application may not pass, even if the actual rate is lower.
