If you’re asking yourself what percentage of your income your mortgage should be, chances are you’re doing the maths around taking the big leap into home ownership. The purpose of this article is to establish if you can shift the hypothetical into the actual.
Generally, when advising on loan strategies, lenders and mortgage brokers use the 28% rule, which dictates that you should use a maximum of 28% of your gross (pre-tax) monthly income on a mortgage repayment.
If you’re an average Australian resident, the following is how a lender will arrive at the 28% income figure. As a jumping-off point, let’s take a look at a weekly gross income of $2000 (very close to the current “full-time adult average weekly total earnings” according to the Australian Bureau of Statistics). Now as promised, here comes the maths:
First let’s find out what 28% of the average weekly income is by applying a formula we all learned in high-school but no doubt the majority of us have entirely forgotten!
Phew, glad we got that out of the way.
Given that most interest rates are sitting around the 6% mark currently, this average Australian income could service a loan of around $400K over a 30 year term. If you want to do that calculation specific to your own borrowing capacity once you’ve worked out your 28% figure, you can use any number of online mortgage calculators.
The reason the 28% rule is applied at the initial stage of seeking finance is to evade the risk of falling into a state of ‘mortgage stress,’ which I might add might currently be the most populated state in all of Australia.
If you’re wanting to steer entirely clear of any surprises, you can always follow the ‘mortgage stress threshold,’ which is currently set at 30%. This will give you some extra wiggle room to feel secure and compensate for potential increases in interest rates.
Now that you know what percentage of your current income your mortgage payments need to sit on or below, you can apply this knowledge to your own pay check. You may not be able to change the 28% rule but you absolutely can shift other factors in and around your income and borrowing capacity by diving into some further reading about How To Calculate Your Borrowing Capacity and How To Increase Your Borrowing Capacity.
These articles will give you a more rounded analysis of what the banks and lenders are going to take into account when assessing your ability to both secure and service a home loan. It will also set you up to make good choices about getting into the housing market without drowning in a sea of debt.
Chances are you’re already paying something close to a potential mortgage payment in rent (or for those living with family, this should be what you’re aiming to save per month).
Comparing your rent to a mortgage payment has not historically been a logical comparison. However, in today’s climate, we’re seeing people pay record high rents while simultaneously trying to accumulate money for a deposit. With the cost of living crisis constantly reducing our disposable incomes, this is not easy for many.
But try not to be discouraged. With lenders like Sucasa, you’ll find that the money you need for a deposit might not be anywhere near as much as you think. After all, if you’re already able to afford a hefty rent, the transition into home ownership should hopefully be smooth sailing.
