What percentage of your income should you spend on your mortgage?

You may have heard a common advise given by some financial advisors, “Don’t spend more than 30 per cent of your income on property”.  Basically, the rule states that individuals (or couples) should not spend more than 30 per cent of their regular income on housing-related expenses i.e. mortgage repayment or rent.

But as property prices have risen significantly over the last decade in Australia, is it still a relevant rule to follow?

For a long time, the rule of thumb approach has been that any consumers who are spending more than this, relative to their level of income, are considered to be in financial distress.

Let’s look at Australia’s most populous state capital, Sydney. In May 2019, Domain released data current to March (2019) quarter, showing that buyers were spending 42.1 percent of their income on mortgage repayments.

Fast forward to March 2020 and news.com.au released the results of their Cost of Living survey and this showed buyers in Sydney were now spending 50 percent income on mortgage repayments.

So much for domains forecast that for Sydney, by June 2020, mortgage repayments as proportion of income would be sub 40 percent. Even with the covid crisis taken into account, it comes as no surprise that domain missed the mark with their forecasting as housing affordability continues to be an issue for first home buyers and upgraders in the real world.

Corelogic’s perception of housing affordability report found nine per cent of non-homeowners are willing to spend half their income on a mortgage despite the potential for putting themselves into financial stress, while a further 21 per cent of non-homeowners stated they would dedicate 40 per cent of their income to a mortgage.

A further 26 per cent are willing to dedicate 30-39 per cent of their income to secure a loan. And on average, Australian households were spending 35 per cent of their gross annual income to service their mortgage. 

The report also found that just short of a quarter of Australians would not be willing to break the 30 per cent rule and would only spend less on property expenses. 

Regardless of which portion of your income you are willing to spend in-order to become a property owner, the first step is to check how much your income allows you to borrow using a borrowing power calculator.

Then, complete a household budget using our budgeting tool, make sure to include the repayments of your proposed loan into your budget planner. Now, subtract the household budget total from your income to confirm that there is sufficient income left to cover any unexpected financial expenses once you become a property owner.

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This article does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.