The process involves determining an affordability metric by simulating various financial scenarios. It quantifies the proportion of an individual’s or entity’s income that would be allocated to debt repayment under differing circumstances, such as changes in interest rates or income levels. For example, one might model the percentage of a household’s gross monthly income required to cover mortgage payments, credit card debts, and other loan obligations under both current conditions and projected economic shifts.
Such a simulation provides valuable insights into financial resilience and risk assessment. It allows for proactive identification of potential financial strain and enables informed decision-making regarding borrowing and investment strategies. Historically, these types of calculations were performed manually, but advancements in technology have led to the development of sophisticated software tools that automate and refine the process, providing more accurate and comprehensive analyses.
