Debt-to-income ratio and the net worth stress test: what do 10 and 25 per cent mean?

In the Danish FSA's (Finanstilsynet) guidance for growth areas, a price fall of 10 per cent is used as the general rule when the debt-to-income ratio is between 4 and 5. If the debt-to-income ratio is above 5, 25 per cent is used.^[1]

It is a calculation of how robust your finances are. It is not a house price forecast, and it is not a general legal requirement that applies equally to all home buyers across Denmark.

In brief

• The net worth stress test shows whether your total net worth is still positive after a hypothetical fall in the home's value.
• With a debt-to-income ratio between 4 and 5, the growth area guidance generally uses a price fall of 10 per cent.
• With a debt-to-income ratio above 5, the guidance generally uses a price fall of 25 per cent.
• The rules in this form come from the Danish FSA's guidance on home lending in growth areas.^[1]
• The growth areas cover Copenhagen and its surrounding area, and Aarhus.
• A net worth stress test and an interest rate stress test are two different calculations.
• The guidance contains exceptions and allows for other acceptable measures. The bank still carries out a specific credit assessment (kreditvurdering).

What is a net worth stress test?

A net worth stress test is a hypothetical calculation.

The bank starts from your net worth after the home purchase. The home's value is then reduced by a set percentage, while the debt as a starting point stays unchanged in the calculation.

The question is:

Are your total assets still worth more than your total debt if the home falls in value?

If the answer is yes, your net worth remains positive in the calculation. If the debt becomes larger than the value of the assets, your net worth is negative.

This is not about the bank expecting a particular price fall. The calculation shows how sensitive your finances are if the market moves the wrong way.

If you first need to get to grips with the figure itself, you can start with the main guide on debt-to-income ratio when buying a home.

Where does the growth area guidance apply?

The Danish FSA's growth area guidance is aimed at the credit assessment when lending against homes in areas with large price rises.

The growth areas cover:

• Copenhagen
• The municipalities around Copenhagen that fall within the guidance's definition
• Aarhus Municipality

The guidance was updated in 2023 and describes how banks and mortgage credit institutions (realkreditinstitutter) should exercise particular caution in these areas.^[2]

This matters because it is easy to assume that everyone with a debt-to-income ratio above 4 anywhere in Denmark faces exactly the same test. It is not that simple.

Banks can use their own credit policies and robustness calculations outside the growth areas. But 10 per cent and 25 per cent must not be presented as one universal rule for everyone.

Why are debt-to-income ratios of 4 and 5 used?

A high debt-to-income ratio means that the debt is large relative to the income that has to carry it.

A positive net worth can make your finances more robust. But if a large part of your net worth consists of the value of the home itself, a price fall can quickly eat up the difference between the home's value and the debt.

The growth area guidance therefore sets out these general rules:

As a general rule, net worth should remain positive after the fall.^[1]

A debt-to-income ratio of exactly 4 is not in the range above 4. A debt-to-income ratio of exactly 5 is in the range between 4 and 5. The higher price fall applies to a debt-to-income ratio above 5.

How net worth is calculated after the price fall

A simplified formula looks like this:

Home's value after price fall + other assets minus total debt = net worth after stress test

Other assets could be, for example, cash savings and securities. The bank values the assets at the amounts it considers realistic.^[1]

The calculation can be set out in four steps:

1. Find the home's value in the bank's calculation.
2. Subtract the relevant price fall.
3. Add the value of other assets.
4. Subtract all debt.

The result is the calculated net worth after the price fall.

Example with a 10 per cent price fall

A household buys a home for 4.000.000 kr.

After the purchase, their finances look like this:

As the debt-to-income ratio is between 4 and 5, a hypothetical price fall of 10 per cent is used in this simplified example.

10 per cent of 4.000.000 kr. is 400.000 kr. The home's value after the price fall is therefore 3.600.000 kr.

Net worth after the price fall is:

3.600.000 kr. + 150.000 kr. less 3.600.000 kr. = 150.000 kr.

Net worth remains positive in the example.

This does not automatically mean that the bank approves the financing. Disposable income (rådighedsbeløb), loan type, documentation and the rest of your finances still count.

Example where net worth turns negative

Another household also buys a home for 4.000.000 kr.

After the purchase, their finances look like this:

After a price fall of 10 per cent, the home's value becomes 3.600.000 kr.

Net worth after the price fall is:

3.600.000 kr. + 50.000 kr. less 3.700.000 kr. = minus 50.000 kr.

Net worth turns negative in the simplified example.

That is the difference the test tries to make visible. A price fall does not change the debt, but it reduces the value of the largest asset.

Example with a 25 per cent price fall

A household has a debt-to-income ratio above 5 and buys a home for 4.000.000 kr.

A hypothetical price fall of 25 per cent equals 1.000.000 kr. The home's value in the calculation is therefore 3.000.000 kr.

If the household has other assets of 600.000 kr. and total debt of 3.500.000 kr., net worth is:

3.000.000 kr. + 600.000 kr. less 3.500.000 kr. = 100.000 kr.

Net worth is positive by 100.000 kr.

If the other assets were only 300.000 kr., net worth would be minus 200.000 kr.

This shows why the higher price fall makes a big difference. The calculation becomes more sensitive when debt is high relative to income.

What counts as net worth?

Net worth is the difference between your assets and your debt.

Assets can include, among other things:

• The home's value
• Cash savings
• Securities
• Other homes or real property
• Other assets that the bank can value

Debt can include, among other things:

• Mortgage loans (realkreditlån)
• Bank loans
• Student loans
• Car loans
• Consumer loans
• Overdrafts
• Other private debt

The growth area guidance says that assets should be included at their realistic values.^[1]

This means that an asset does not necessarily count at the value you yourself hope to sell it for. The bank can use a more cautious value or disregard assets that are hard to document or sell.

Read more in the guide on net worth in the bank's assessment.

Net worth is not the same as money in your account

You can have a positive net worth and still have little cash left.

An example:

• The home is worth 4.000.000 kr.
• The debt is 3.400.000 kr.
• You have 25.000 kr. in your account.

Your calculated net worth is 625.000 kr. But only 25.000 kr. is immediately available in your account.

It is therefore important to distinguish between:

Net worth

The value of all assets minus all debt.

Equity (friværdi)

The difference between the home's value and the debt secured on the home.

Liquid buffer

The money and assets you can use quickly if an unexpected bill comes in.

The net worth stress test is about your total net worth. Everyday life after the purchase also depends on disposable income and your liquid buffer.

A net worth stress test is not an interest rate stress test

The terms are often mixed up, but the calculations examine two different risks.

The net worth stress test is about the balance between assets and debt.

The interest rate stress test is about the money coming in and going out each month. In growth areas, an interest rate stress test must be included in the calculation of disposable income for home buyers.^[3]

You can therefore have a positive net worth after a price fall and still end up with a stretched monthly budget at a higher interest rate. The opposite can also happen.

Read the full guide on disposable income when buying a home.

Is the net worth stress test a legal requirement?

It is more accurate to describe it as a general rule in the Danish FSA's guidance to the institutions in growth areas.

The guidance describes what banks and mortgage credit institutions should take into account in their credit policies and specific assessments. It contains exceptions and other acceptable measures.^[1]

Calling it a universal legal requirement is therefore too categorical.

At the same time, the bank must follow the general rules on creditworthiness and good practice rules (god skik) for home loans. The combination of rules, guidance and the bank's own credit policy decides how each case is handled.

Can the bank approve if net worth turns negative?

The growth area guidance contains exceptions and allows for other compensating factors. A negative calculated net worth therefore does not in itself mean a rejection, and a positive net worth does not guarantee approval.

The bank can look at, among other things:

• How stable your income is
• The prospect of a change in income
• Disposable income
• Loan-to-value ratio, LTV (belåningsgrad)
• Loan type and repayments (afdrag)
• Other assets
• Security provided by a third party
• The overall credit risk

Which factors the bank can give weight to depends on the documentation and the rules that apply to the specific financing.

It is therefore better to see the stress test as one layer of the assessment. Not as an exam with a single right answer.

What does the loan-to-value ratio mean?

The loan-to-value ratio shows how much of the home's value is financed with loans.

The formula is:

Loans secured on the home ÷ the home's value × 100 = loan-to-value ratio

The debt-to-income ratio compares debt with income. The loan-to-value ratio compares loans with the home's value.

A buyer can therefore have a high debt-to-income ratio and a low loan-to-value ratio if the buyer brings a lot of their own money. Another can have a lower debt-to-income ratio and a high loan-to-value ratio if almost the whole purchase price is financed.

The bank looks at the combination because the two figures describe different parts of the risk.

What can change the result?

The result changes when the value of assets or the size of the debt changes.

This can include, among other things:

• A different valuation of the home
• More or less debt after the purchase
• Existing student loans or car loans
• Savings left over after purchase costs
• Securities that the bank includes
• Other properties and the debt that comes with them

A larger down payment (udbetaling) can reduce the debt, but it also uses up part of the liquid assets. Both sides of the calculation therefore need updating. You cannot just lower the debt and leave the savings unchanged in the example.

This is one of the most common mistakes in a home-made net worth stress test.

Common misunderstandings

The bank expects the home to fall 25 per cent

No. The price fall is a hypothetical scenario used to examine robustness.

The test automatically applies to everyone in Denmark

No. The specific levels of 10 per cent and 25 per cent come from the growth area guidance.

A positive net worth means the loan will be approved

No. Disposable income, loan type, creditworthiness and the rest of your finances also count.

A negative net worth automatically means rejection

No. The guidance contains exceptions and allows for other acceptable measures. The bank makes a specific assessment.

Net worth is just my savings

No. Net worth is the value of all assets minus all debt.

A price fall changes the debt

No. In the stress test, the home's value is reduced, while the debt is still included at its full amount.

Net worth stress and interest rate stress are the same thing

No. The net worth stress test examines assets and debt. The interest rate stress test examines your monthly finances at a higher interest rate.

In short

The net worth stress test takes a single question and makes it visible in kroner:

Are your assets still worth more than your debt if the home falls in value?

In the growth area guidance, the general rule is a fall of 10 per cent with a debt-to-income ratio between 4 and 5, and 25 per cent with a debt-to-income ratio above 5.

It is not a forecast and not a universal legal requirement for all home buyers. It is part of assessing how robust your finances are in a difficult scenario.

Start by working out your debt-to-income ratio in the debt-to-income ratio calculator.

BoligKlar gives you a second pair of eyes and an overview. The bank makes the final credit assessment and calculates the stress test according to the rules and methods that apply to your financing.

Frequently asked questions