What loan installment can you actually afford?

This is a very tempting vision that can cloud your judgment and push you toward impulsive decisions—not just buying an overpriced property, but also taking out a loan you simply won't be able to afford. Instead of relying on the old saying "it'll all work out somehow," it's better to cut your coat according to your cloth.

Expectations vs. hard reality

We take out a loan here and now. And even though we know it’s a commitment for twenty or thirty years, we tend to assume, contrary to logic, that our situation will always look the way it does today.

That’s not true! A lot can change—inflation will drive up your daily expenses, while your salary may not grow at the same pace. The WIBOR rate could change drastically, causing your monthly installment to jump by hundreds of zlotys. Perhaps you’ll decide to have a child, which is a significant expense, and one of you might not be able to work? One night, you’ll be lying in bed staring at the ceiling, wondering if your eyes are red from exhaustion, anger, or despair.

I’m not trying to make you a pessimist, but rather encouraging you to approach the topic cool-headedly and analyze the potential risks. People who took out loans in Swiss francs were also very happy at first. They haven't been for a long time now.

The alternative costs of a loan

You’ve surely heard it many times in your circle: "real estate is the best investment," "you can't lose on property," or "a home means security." This often comes from the older generation, who equate owning property with financial security. It’s no wonder—during hyperinflation, cash became worthless, and a property served its purpose as a place to live regardless of its price.

Real estate did indeed save the assets of that generation, but in most cases, it wasn't bought with a loan, but with cash. And that is a huge difference, even today. So, let’s skip the debate over whether we’ll experience hyperinflation again and look at the indirect costs of a loan.

• Stagnation — For the next few decades, you have to pay off your mortgage installments. It will be an inseparable part of your household budget, whether you like it or not. For many, this becomes a significant psychological burden.
• Risk — The vast majority of loans in Poland are granted with a variable interest rate. Just as interest rates can fall, they can also rise. While market interest rate forecasts for the coming quarters are standard, predicting the next twenty years is pure guesswork. It is impossible to foresee what will happen in the future. By taking out a loan today on great terms, you have no guarantee they will stay that way.
• Liability with all your assets — Although banks may offer "keys for debt" options, they are not eager to use them. In the event of major problems with mortgage repayment, the property may be auctioned off, which does not necessarily mean your debt will be fully covered.
• Limited options — Although you theoretically took out a loan for your dream property, plans change. Perhaps in a few years, you’ll want to move elsewhere or get a great job offer, but you’ll have little time to decide. Selling a property isn't impossible, but the whole process can take quite a while and involves costs. As a result, you’ll be less willing to make changes and more likely to pass up new opportunities.

What monthly payment can you afford?

In accordance with Recommendation S, banks should not grant loans where the total monthly payments, including other liabilities, exceed half of a household's net income. This means that if you earn six thousand zlotys net, the sum of your debt payments should not exceed three thousand zlotys.

Let's assume, however, that you have no other debt besides your mortgage, and you consider one-third of your income—two thousand zlotys—to be a safe level.

• Are you truly prepared for such an expense for the coming years?
• Is living on the remaining amount comfortable and free of sacrifices?
• How predictable is your income?
• How quickly could you find a new job if you were to lose your current one?
• Will this force you to dip into your savings?
• Where would you get extra money if you ran into trouble?

I cannot give you a specific monthly payment amount that you can afford. That would be irresponsible. I don't know your income, your standard of living, or your approach to personal finance. However, I can suggest a simple test to put your assumptions to the test in the real world.

Choose a monthly payment amount you think you can manage, for example, two thousand zlotys, and immediately after receiving your paycheck, transfer that amount to a separate account or sub-account. Do this for a few months and see how it affects your life. This is what your reality will look like for the next dozen or so years. Of course, if you are currently paying rent, reduce the transfer amount accordingly.

Did your assumptions hold up? Did you manage without any issues? That’s great, but it won’t always be that way. Perhaps in a few months, your installment will increase by several hundred zlotys. What then, and how likely is that to happen? I will dedicate a separate piece to this.