Do you know how to calculate your effort rate? Discover everything

The effort rate is one of the crucial elements when applying for housing credit, functioning as the limit for a household's charges, as it takes into account expenses and net monthly income. This calculation will serve as the basis for attributing your credit, as the Bank of Portugal recommends that banks avoid granting loans to people with effort rates above 50%.

To have balance, your effort rate, ideally, cannot exceed 30%, which is why it is necessary to maintain prudent and organized management of your finances. And to have this control, it is important to understand the relevance of the effort rate, which we explain in this article.

What is the effort rate for?
In addition to being a crucial indicator for assessing the financial health of a household, it represents the percentage of total net income allocated to paying installments on loans taken out, particularly housing loans.

Determine payment capacity
The effort rate works as a thermometer of a household's capacity, determining whether or not it has the financial capacity to meet its commitments, particularly a housing loan.

A very high rate will mean a great effort in paying extraordinary expenses, compromising not only your savings capacity, but also your investment capacity, and access to new credits may be more restricted.

Promote financial sustainability
As we explained above, Banco de Portugal recommends that a household's effort rate does not exceed 50%, where, at most, only half of a family's net income can be allocated to the payment of installments. This advice serves to mitigate the risks of household financial vulnerability, leading to possible defaults, and thus promote financial sustainability that maintains balance in their budgets.

Assess credit risk
When credit is contracted, banks are obliged to use the effort rate as one of the main indicators in assessing the credit risk of a potential customer, as this will influence their ability to respond to unforeseen situations that may arise, determining whether they have the resources to cover expenses.

How is the effort rate calculated?
This is a relatively simple calculation, which we will give you an example of:

 • Mónica earns €1,200/month net and Dinis earns €820/month. The two have a mortgage loan worth €600 and a car loan installment worth €95. But they also have monthly credit card charges of €50. Doing the math, the couple's effort rate is 36.8%. Find out how we arrived at this percentage:

Effort Rate = ((600 + 95 + 50) / 1,200+820) x 100 = 36.8%

In this example, the household's effort rate is 36.8%, which means that 36.8% of its net income is allocated to paying credit installments. This value is within the Banco de Portugal recommendation, but it is important to monitor the effort rate regularly and take measures to reduce it, if necessary.

How can you reduce your effort rate?
In situations where effort rates are very high, it is important that you try to renegotiate your loan, if you have one. By doing this, you will be able to obtain better financing conditions and a reduction in your effort rate, which can occur through an extension of the payment period.

Alternatively, you can always transfer your credit to another bank or financial institution, looking for the one that offers you better conditions and, if you have more than one loan, consider combining them into one.

Here are some tips to reduce your effort rate:
 • Renegotiate the credits you have under contracts and try to obtain better conditions;
 • Amortize the capital of outstanding credits;
 • Avoid new credits;
 • Increase family income;
 • Reduce unnecessary expenses

A controlled effort rate will also allow you greater control over your finances and, consequently, greater financial stability. You will be able to save and invest more, opening doors to new opportunities!

Source: SUPERCASA