How much of your income should you spend on a mortgage?

When it comes to buying a new property, one of the first things to think about is how much money you can afford to repay each month.

While taking out the largest mortgage possible might seem tempting, the higher the mortgage, the higher the repayments, so too much could see you end up with very little left over each month.

Or worse, put you at risk of mortgage default.

And there’s one easy way to work it out:

Consider your mortgage as a percentage of your income.

Here’s how it works.

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

There are three different calculations you can use to work out what percentage of income should mortgage be.

Examples are provided as a guide to calculate income to mortgage ratio, using Australia’s average gross salary of $1,923.40 per week - or $8,334.73 per month - according to the latest ABS figures.

The 28% rule

Many 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.

Any more and you could risk falling into what some people call “mortgage stress.”

Using the ABS’ latest data on average weekly earnings in Australia the calculation would look like this.

$1,923.40 x 4 (weeks) x 0.28 = $2,154.20 per month

Under this rule, the maximum amount the borrower can afford for mortgage repayments is $1,154.20 per month.

The 35% / 45% rule

This is another housing payment rule using your gross monthly income and also takes into account your post-tax income.

The rule dictates that the mortgage percentage of income shouldn’t be more than 35% of your gross income and not more than 45% of your net income after tax.

This is a handy calculation if you have a lot of tax deductions or have an income in a high tax bracket.

Again, using Australia’s average weekly earnings, the calculation would look like this.

$1,923.40 (gross income) x 4 (weeks) x 0.35 = $2,692.76

$1,484.00 (net income) x 4 (weeks) x 0.45 = $2,671.20

Under this rule, the maximum amount the borrower can afford for mortgage repayments is $2,671.20 per month.

The 25% post-tax rule

The final rule uses only net or post-tax, income and states that a maximum of 25% of your net income can go towards mortgage costs.

Again, using Australia’s average weekly earnings with the tax removed, the calculation would look like this.

$1,484.00 (net income) x 4 (weeks) x 0.25 = $1,484.00

Under this rule, the maximum amount the borrower can afford for mortgage repayments is a much lower $1,484.00 per month.

However, it is worth noting that each person’s financial situation is different and there are some who would be better suited to one method versus another.

The average monthly mortgage payments in Australia by state

The average loan size for owner-occupier dwellings (including construction and the purchase of new dwellings and existing dwellings) as of August 2024 varies across each state.

It’s also worth noting that these are average figures so some loans and repayments could be much higher or smaller.

Here is the average loan size for each state, according to ABS figures, and an estimate of monthly repayments using Canstar’s home loan repayments calculator which is calculated using a $600,000 loan repayment of principal and interest, over 30 years, 80% LVR, at a rate of 6.86%.

State	Average loan size	Average monthly repayment
NSW	$771,422	$5,060
VIC	$616,877	$4,064
QLD	$603,988	$3,962
SA	$555,934	$3,647
WA	$552,154	$3,622
TAS	$467,057	$3,064
NT	$416,667	$2,733
ACT	$613,612	$4,025
Australia	$631,208	$4,173

Source: Australian Bureau of Statistics lending indicators, and Canstar’s home loan repayments calculator.

How much income do you need to buy a house in Australia?

When it comes to working out the amount of money needed for a mortgage in Australia, the answer is based on a myriad of factors.

Unfortunately, there isn’t a magic formula that will tell you that you need $x income to buy a $1 million house… because your income is just one part of the equation.

Why?

Because of the way the banks calculate mortgage affordability, the amount of mortgage you may be eligible for is dependent on not just your income, but your situation and expenses too.

Here are some examples of roughly how much you need to earn to buy a house, but note that these figures are estimates and are calculated assuming the borrower has no debts, liabilities, or dependents, and using an example interest rate of 5.99% per annum over a 30-year loan term.

To buy a $300-340k house you need a $50,000 salary

• A $50,000 annual gross income with a mortgage at 5.99% p.a. equates to a loan amount of up to $272,232.
• With a 10% deposit contribution, the maximum affordable property price would be $302,480, or with a 20% deposit $340,290.

To buy a $430-490k house you need a $70,000 salary

• A $70,000 annual gross income with a mortgage at 5.99% p.a. equates to a loan amount of up to $391,222.
• With a 10% deposit contribution, the maximum affordable property price would be $434,691, or with a 20% deposit $489,027.

To buy a $580-660k house you need a $100,000 salary

• A $100,000 annual gross income with a mortgage at 5.99% p.a. equates to a loan amount of up to $528,233.
• With a 10% deposit contribution, the maximum affordable property price would be $586,925, or with a 20% deposit $660,291.

To buy a $735-830k house you need a $125,000 salary

• A $125,000 annual gross income with a mortgage at 5.99% p.a. equates to a loan amount of up to $663,710.
• With a 10% deposit contribution, the maximum affordable property price would be $737,455, or with a 20% deposit $829,635.

What are the risks of borrowing too much?

It might be tempting to get the biggest mortgage possible but borrowing too much can be risky for four key reasons.

1. It could put you into mortgage stress

The first and most significant risk of borrowing too much is mortgage stress.

When that happens, households often need to sacrifice other things to balance their budget.

Now, while this is a typical figure used in the finance industry, “mortgage stress” really depends on a lot of factors, and the higher the income the less relevant this percentage is because you still have a lot of disposable income left over.

2. You risk the property going into negative equity

Another worrying risk to consider is that if you take out the maximum home loan possible, you could end up in negative equity if the market drops.

A negative equity position occurs when the amount owed on a property is greater than the value of that property.

A good strategy to offset the effects of negative equity is to hold the property if there’s a downturn in the market because these are always short in duration and the long-term trend is for the value of well-located properties to increase.

So continue your mortgage repayments and reduce your outstanding debt, while waiting for the property's valuation to increase.

3. You may have difficulty making repayments

Not only might borrowing too much put you into mortgage stress, but it might also mean you struggle to make repayments.

It’s vital you consider all your financial responsibilities and are able to leave wiggle room for if and when your financial situation changes or a surprise bill occurs.

Failing to make repayments, or making them late, can have a detrimental impact on your credit score and therefore any ability to borrow further down the track.

4. It will leave you with limited flexibility

Borrowing too much will also limit your flexibility and might stop you from being able to enjoy other opportunities.

For example, it may prevent you from taking on more debt when and if needed, and you might be unable to make any other investments.

Ways to keep your mortgage payments under control

The best way to keep your mortgage payments under control is to avoid taking on too much debt to start with.

Otherwise, there are a few steps you can follow to ensure you avoid any costly penalties and stay on the repayment track.

1. Set a budget, and stick to it

Work out what percentage of your income you can afford to spend on monthly mortgage repayments, using one of the methods explained above.

Once you have a budget, make sure you stick to it.

2. Cut back on your debt elsewhere

Cut back on your debt elsewhere, particularly bad debts that don’t add value to your finances.

With debt out of the way, you’ll be able to free up more of your finances to put towards your mortgage payments.

• Also read:How much of your income should you spend on a mortgage?
• Also read:Pre-settlement inspection guide: what to inspect, why and when
• Also read:The offer and acceptance process when buying a property
• Also read:Caveats – The Red Flags of Real Estate
• Also read:How much you need for a house deposit in each Aussie city

3. Where possible, pay more than the minimum

Where possible, try to pay more than the minimum amount on your mortgage.

This helps to keep ahead of the payments required and adds money aside for if and when finances are tight. 

4. Set up a direct debit

Managing your mortgage payments requires discipline to make sure it is paid on time - setting up a direct debit makes good sense to help with the process. 

5. Always pay on time

Never miss a payment or pay late - if you get into financial strife, always contact your lender to explain your situation ahead of when the payment is due (or overdue).

There are things they can do to help if you’re upfront about your finances. 

6. Review your rate regularly and compare it with other providers

Home loan rates constantly change so it’s always worth keeping on top of what other lenders are offering and even what better rates your current provider may be able to give you.

But with the right strategy and the best organisation of your finances, you can be sure that you’re putting yourself in harm's way financially.