Credit refused for exceeded DSTI? Savings in Minuto can help.

If your loan or transfer was rejected due to excessive DSTI ratio, know that there is still hope. By negotiating with the banks, you may be able to get an approval. So, what are you waiting for to contact the credit intermediaries of Poupança no Minuto ?

If you still want to understand what the DSTI ratio is and why a loan may be rejected due to this requirement, we will explain.

What does DSTI mean?

DSTI - Debt Service-to-Income - indicates the level of financial effort a client has to make to pay off a debt.

This indicator arose from a macroprudential measure defined by recommendation of the Bank of Portugal (BdP) regarding new financing (including credit transfers).

As the BdP aims to ensure the country's economic and financial stability, it decided to adopt this measure to help banks to be prudent when granting loans.

Therefore, the DSTI ratio has come to help determine a client's solvency for the granting of credit, to assess the risk of default on it.

But what does this concept represent in credit? According to BdP, the DSTI is the "ratio between the amount of the monthly installment calculated with all loans of the borrower(s) and the monthly income(s), calculated in accordance with article 4." In other words, it represents the degree of financial effort that the client will have when paying off the credit debt.

However, this measure only applies to new contracts entered into from July 1, 2018, except for exceptions determined by BdP, covering all Portuguese banks and financial companies based or with branches in Portuguese territory, authorized to grant loans in the country.

How does the DSTI work on credit?

So, in practice, and according to BdP's recommendation, for hiring new credits, including transfers, "it is recommended that institutions do not grant credit resulting in a DSTI higher than 50%."

So, in order to ensure that a proponent keeps 50% of their net income available outside of credit payments, banks apply a stress factor of 3% above the current interest rate.

This is another criterion to assess the risk level of a client and the likelihood of them meeting or not meeting the monthly credit installments. Therefore, it should be within the recommended values. But how is it calculated?

First, it is necessary to apply a stress factor of +3% to the chosen credit index (or in use, in the case of transfer). To understand if, in case interest rates continue to rise, the applicant maintains, at least, 50% of their available income for day-to-day expenses.

To verify this situation, the sum of all monthly credit installments of a client (already with an additional 3% on the interest rate index of the credit) is made, along with the net monthly income (with tax deductions and mandatory contributions to Social Security). Therefore, to calculate the percentage of this indicator, it is necessary to use the following formula:

DSTI = (Monthly installments/ Monthly net income) x 100

For example, let's consider that Fernando has a total of monthly installments equal to 500 euros with the stress factor applied to the installment of the credit he intends to contract, and receives a monthly net income equal to 1,100 euros.

(500/1,100) X 100 = 45.5%

Calculating through the formula above, Fernando has a DSTI ratio with stress equivalent to 45.5%, which is within the value recommended by the Central Bank. This means that the probability of this client getting his credit approved is high, as he has a low risk of default.

My credit was denied by DSTI, what now?

Currently, there are many credits and credit transfers being refused due to the DSTI ratio with exceeded stress that banks apply to assess a client's financial capacity in the face of debt.

For context, the BdP created this criteria when the European Central Bank (ECB) reference rate was at 0, leading to negative benchmarks (Euribor at 3, 6, and 12 months). As a precaution, anticipating that the scenario would change, it established this value as a guarantee for loan payments after an increase in benchmarks.

Contextualizing the history of Euribor

The European Central Bank took precautions through this measure, already aware of the history of Euribor. Which, as a rule, tends to suffer significant spikes in increase, as has already been observed twice in the last few decades.

Having been created in 1999, with Euribor rates of 3.233% for six months and 3.213% for 12 months, in the first months there was still a decrease. But already in June, the first peak was recorded, with rates exceeding 5.3% for 12 months, continuing until 2000, when the 6-month term reaches 5.1%. From then on, until 2004, Euribor rates fall again, reaching another peak in late 2005 and until 2008 rates maintain an upward trend, reaching 5.5%.

And since 2016, Euribor rates continued to fall, reaching negative values (moment when the DSTI ratio was created), with the forecast of a new increase that ends up happening in 2022. This is due to the increase in interest rates by the ECB following high inflation rates.

So, the refusals have been coming from the benchmark rates now continuing to rise. With the increase in the key rate to 4% in July, it is increasingly challenging to approval of new financing (acquisitions or transfers). Since most clients are already very close to or already above the recommended 50% ratio.

Despite the recognition from the vice-governor of BdP to change this requirement, the recommendation has been maintained.

Savings at Minuto can help with credit approval or transfer

But it is not only the DSTI ratio with stress that banks take into account: and, therefore, it is important to pay attention to other factors that can help with credit approval or transfer. Banking institutions also look at the client's income, the presence or absence of a guarantor, the value of other regular expenses. All of this impacts the fulfilment of credit installments.

Therefore, the BP practices some exceptions that are justified in specific risky situations, proceeding with case-by-case assessments.

But it is necessary to have clear communication and negotiation with the banks. And that's why Poupança no Minuto is here: By using our credit intermediation service, you can rely on an experienced agent to help you in this process.

If you have seen your credit or transfer being refused because the DSTI ratio has been exceeded, contact us and let the professionals negotiate with the banks for you. Credit intermediaries Poupança no Minuto help you for free and quickly, so that you can get your financing approved without complications.