Figuring out how much of your budget to spend on a mortgage is a big decision. It affects your financial flexibility, savings goals, and day-to-day life. Budgeting carefully can help you afford your mortgage payments without feeling stretched.

The “right” percentage of your income depends on your unique circumstances. Everyone’s financial situation and priorities are different, and what works for you might not suit someone else.

This article explores key factors to consider when deciding how much of your budget to allocate to a mortgage. Hopefully it gets you one step closer to making a choice that aligns with your goals.

Popular budgeting rules

Budgeting rules offer quick guidelines to help you decide how much of your take-home pay to spend on a mortgage loan . While helpful, they’re not blanket rules. Here are some examples of widely used rules.

The 28/36 rule

This rule is popular worldwide and sets clear limits:

• Spend no more than 28% of your gross income on housing costs.
• Keep total monthly debt payments, including a mortgage, student loan, and credit card debt, under 36% of your gross income.

For example, if you earn $100,000 annually, your housing costs should stay under $28,000 per year, or around $540 weekly. Total debt should stay under $36,000 annually.

Australian-specific benchmarks

In Australia, many lenders use similar benchmarks when assessing loan affordability. Some recommend keeping housing costs under 30% of your income, slightly more generous than the 28/36 rule. This is sometimes called the “housing affordability threshold” rule. Exceeding it can leave households financially stretched.

50/30/20 rule

This general rule is applied on an international scale and suggests allocating your after-tax income as follows:

• 50% for needs: Essentials like housing, groceries, utilities, and transport.
• 30% for wants: Non-essential spending, like dining out or entertainment.
• 20% for savings or debt repayment: Includes super contributions, emergency funds, and paying down loans.

A mortgage payment typically falls under "needs," meaning it shouldn't exceed 50% of your post-tax income.

Debt-to-income ratio (DTI) benchmarks

In some countries, lenders assess your DTI ratio, calculated by dividing total debt payments by gross income. For example:

• United States: A DTI under 43% is often required to qualify for loans.
• Canada: The recommended limit for housing costs is around 39% of gross income.

Limitations of budgeting rules

While these rules provide a starting point, they may not reflect your personal situation. Here’s why:

• They don’t account for individual expenses, like childcare, healthcare, or lifestyle costs.
• High-income earners may find the percentages too restrictive, while lower-income earners may struggle within the limits.
• Housing markets vary, so these rules might be unrealistic in areas with higher property prices.

These guidelines can help frame your budget, but flexibility is key. Relying solely on them may not give you the full picture.

Factors to consider when setting your budget

Setting a mortgage payment budget requires more than following a rule. Here are some factors to think about:

Income level and stability

A steady income makes it easier to manage mortgage payments. Consider how secure your job or business income is. If your income fluctuates, leave room for variability.

Other financial obligations

Factor in current debts like a student loan, credit card, or car loan. How much you owe in other debts impacts how much you can comfortably spend on a mortgage payment each month. Living expenses, utilities, and childcare costs also add up quickly. Don't forget your savings goals, including superannuation contributions or building an emergency fund.

Lifestyle preferences

Think about your priorities. Do you prefer flexibility in your budget, or is home ownership your main focus? A larger mortgage can reduce spending options, while a smaller one leaves more for other goals.

Interest rate fluctuations

Interest rates can rise , increasing your mortgage payment each month. Consider whether your budget can handle higher rates over the life of your loan. Many lenders offer calculators to estimate mortgage payment changes with rate increases.

Emergency fund and financial buffer

Unexpected expenses happen. Having an emergency fund can reduce stress and help cover your mortgage payment obligations if your situation changes. A financial buffer also provides flexibility if interest rates rise or your disposable income drops.

Balancing these factors can help you set a mortgage budget that works for your circumstances, keeping you prepared for what lies ahead.

How Australians typically approach mortgage spending

Australians often spend a significant portion of their income on mortgages, reflecting the country’s high property prices and strong home ownership culture.

Average percentage of income spent on mortgages

On average, Australian households spend more than the housing affordability threshold rule of 30% of their income on housing costs, including mortgage payments.

According to the latest REIA Housing Affordability Report , Australians are now spending about 48% of their household income on mortgage repayments.

In some cities like Sydney and Melbourne, this percentage is even higher due to elevated property prices. For New South Wales, the median proportion of income required for loan repayments was 57.9% in the June 2024 quarter .

Trends in the Australian housing market

Recent trends show an increase in housing costs relative to income as housing affordability becomes a growing challenge in Australia. Property prices in major cities have risen steadily over the years, often outpacing wage growth. This trend forces many households to allocate a larger share of their income to mortgages.

Low interest rates in recent years encouraged borrowing and drove up demand for housing. However, with recent rate hikes, many borrowers are paying a higher mortgage payment each month. These changes make affordability a key consideration for those entering the housing market or managing existing mortgages.

Understanding how Australians typically manage their mortgage spending can offer useful insights. But as we’ve said, your budget should reflect your personal financial situation and priorities. Consider what mortgage you can afford while still meeting your other financial goals.

Factors influencing housing affordability

Housing affordability depends on several factors, including economic conditions, government policies, and personal circumstances. Here’s a closer look:

Property prices

The cost of homes directly impacts affordability. In areas with high demand, like major cities, property prices tend to rise, making housing less affordable. Conversely, regional areas often offer more affordable options. However, these property price trends can change, and past experience isn’t a reliable indicator of future results.

Interest rates

Interest rates affect how much you pay on a mortgage. Lower rates reduce monthly payments, while higher rates increase borrowing costs. Rate changes can significantly impact affordability over time.

Income growth

Wage growth plays a key role in affordability. If incomes rise slower than property prices, it becomes harder for people to afford homes without stretching their budgets.

Government policies and incentives

Policies like stamp duty exemptions, first home buyer grants , or the First Home Super Saver Scheme can improve affordability, especially for those entering the market. On the other hand, tighter lending rules may limit how much people can borrow.

Housing supply and demand

A shortage of available homes increases competition, driving up prices. Conversely, increased supply, such as new developments, can help stabilise prices and improve affordability.

Location and lifestyle

Proximity to work, schools, and amenities often increases demand, making homes in convenient locations more expensive. Regional areas may offer better affordability but might require trade-offs in terms of access to facilities.

Personal financial situation

Your financial health influences affordability. Factors like existing debt, savings, and income stability determine how easily you can afford mortgage payments.

Making a personalised decision

A tailored approach to setting your mortgage budget works best because, as we’ve said, every financial situation is unique. What feels manageable for one person may not suit another. Here's how you can create a plan that works for you.

Why a tailored approach is important

General budgeting rules are useful starting points, but don’t reflect individual circumstances. Factors like income stability, lifestyle preferences, and existing financial commitments vary widely. A personalised plan helps ensure your mortgage payments fit your specific needs and objectives.

Tools to calculate an appropriate percentage

Several tools and resources can help you estimate a suitable mortgage budget:

• Budget calculator: Many banks and financial websites offer calculators, like MoneySmart’s mortgage calculator to help estimate affordable payment levels based on your income and expenses.
• Professional advice: A financial adviser or mortgage broker can provide tailored guidance, considering your entire financial picture.
• Spending trackers: Apps and tools that track your expenses can give a clearer picture of what you can afford without overstretching.

Using these tools can give you a better sense of what works for your unique circumstances.

Revisiting your budget regularly

Your financial situation can change over time. Reviewing your budget ensures it still aligns with your goals and accounts for new expenses or income. Rate changes, job transitions, or lifestyle adjustments might all require you to reassess how much you can afford spend on mortgage repayments.

A personalised approach gives you confidence and flexibility. By using the right tools and revisiting your plan, you can make informed decisions that suit your situation.

Your mortgage, your budget

There’s no right amount of your budget to allocate toward your mortgage. Everyone’s financial circumstances are different.

As we’ve discussed, the right percentage depends on your income, expenses, lifestyle, and long-term goals. It’s important to weigh these factors carefully. Use tools like budget calculators, seek guidance if needed, and revisit your plan regularly to ensure it stays relevant.

Adopting a personalised approach can help you feel confident in making a decision that suits your unique circumstances and priorities.

Happy budgeting!