Alan Hartstein
Athena Cocoves
There are a few rules to consider when determining what percentage of your income should go to mortgage repayments.
The 28% mortgage rule
The recommended figure that most lenders and property experts like to bandy about is 28% of pre-tax income. That means no more than 28% of your gross monthly income should go towards your monthly mortgage repayment.
- Example based on monthly income: If your pre-tax monthly income is $9,000, you shouldn’t pay more than $2,520 towards your mortgage each month. You can find that number by multiplying your monthly pre-tax income ($9,000) by 28% (0.28).
- Example based on home loan size: If you want to borrow $500,000 for a standard 30-year home loan with a 5.89% interest rate, you’d need to earn at least $10,614.29 each month — or a $127,371.48 salary — to afford the $2,972 monthly repayment.
Mortgage stress threshold
You can also follow the mortgage stress threshold — currently 30% — to identify reasonable monthly payments.
- Example based on monthly income: If your monthly pre-tax income is $9,000, you need your monthly repayments to stay below $2,700.
- Example based on home loan size: For that same standard $500,000 home loan, you’d need to earn at least $9,906.67 monthly — or a $118,880.04 salary.
🤓 Nerdy Tip
As a first homebuyer, you have a lot to think about and high on the list should be what size mortgage you can realistically pay off, not how much you can borrow, because they are sometimes different.
Debt-to-income ratio
A mortgage-to-income ratio will clearly indicate how much you should spend on your mortgage while maintaining a buffer against unforeseen circumstances. As a first home buyer, another indicator that lenders will look at closely is your debt-to-income (DTI) ratio.
DTI means the total amount of debt you will carry when you take out a mortgage against your income. Income can include regular income from investments, employment, overtime work, bonuses and dividends from shares. Debt could consist of everything from credit cards and personal loans to tax debts and buy now, pay later loans.
To find your DTI, divide your debt by your gross income. For example, say you want to borrow $800,000 to buy a property. You also have a $25,000 car loan and $20,000 in credit card debt. Your total debt would be $845,000. If your gross income is $150,000, your debt-to-income ratio is $845,000 ÷ $150,000. That’s 5.63% or 5.63 DTI.
🤓 Nerdy Tip
Lower DTIs are better, and higher ratios will make securing the loan you may want harder. However, given that you don’t really want to borrow more than you can afford, that’s probably not bad. You can always lower your DTI by saving a higher deposit or paying off other debts, such as credit cards.
What is a good debt-to-income ratio for a mortgage?
Each lender has its own terms and conditions when assessing DTI, but as a general guide:
- A DTI of 3 or below is very good
- A DTI of 4 to 6 is good but not great
- A DTI over 7 is generally considered risky.
Australian lenders have tightened their lending requirements since the pandemic and have clamped down especially hard on high DTI ratios. The Big Four banks are all somewhere between 7 and 8 — depending on the type of loan and the amount you wish to borrow.
However, lenders also always look at your individual circumstances. So, DTI guidelines are not necessarily set in stone. Lenders may refer your application to their credit departments for review or offer you more leeway — for example, if you have a guarantor.
Your budget
One of the best ways to figure out what percentage of your income you’d be comfortable going to your mortgage is with a simple budget. This starts with factoring in your monthly expenses and any money that regularly comes from your account.
Some people, especially those without children and with a joint mortgage, can put over 30% of their salaries onto their mortgage and still live comfortably without ever coming close to mortgage stress. Many homeowners want to pay off their mortgage as quickly as possible. So, they may be happy paying up to 50% of their income onto their mortgage, at least for a few years.
Making a budget will still give you a clearer indication of what you can realistically afford. If you are renting, that may give you some idea of where you will likely be once your mortgage starts.
» MORE: Should you buy or rent?
What is typical for a mortgage in Australia?
Property prices across the country have risen by a massive 23.6% since February 2020, placing the average owner-occupier property at $593,000 in July 2023. Until fairly recently, historically low rates have kept mortgage stress at bay. However, there’s been a dozen interest rate hikes since then. So, the impact of mortgage repayments on household budgets is under the spotlight again.
Somewhat alarmingly, a recent report found more than 1.43 million mortgage holders (28.7%) are already experiencing mortgage stress or at risk of mortgage stress[1].
Even more worrisome is a May 2022 report from ANZ CoreLogic about Housing Affordability, which found that mortgagees, on average, needed to spend more than 40% of their incomes to service their mortgages. That’s way above the 28% mortgage rule and stress threshold.
» MORE: How long will it take to pay off my mortgage?
How to lower your mortgage repayments
Remember, a mortgage can run for up to 30 years, and your income is highly likely to change over that time due to any number of circumstances. Fortunately, you can take some steps to lower your mortgage repayments in a crisis.
- Contact your lender immediately. First, you need to contact your lender and talk to them. If you’re unsure what to say, you can get a broker to speak with them on your behalf. Your lender should have a range of options for you, depending on the size and length of your mortgage. They also have hardship policies that could help you get back on your feet. Just be wary that while some of your lender’s solutions can get you out of an immediate pickle, they may cost you more in the long run.
- Refinance your loan. Depending on how long you’ve had your mortgage, you should have some equity in the property. That allows you to refinance your loan for better terms and conditions potentially.
- Look for a better mortgage deal elsewhere. Jumping ship to another lender may be problematic if you’re experiencing financial hardship. Still, it may be easier if you have built up a certain amount of equity and you can negotiate a longer mortgage, for example. Once again, finding a mortgage broker may be beneficial because they should know what’s available for people in similar circumstances.
- Move to an interest-only or a fixed loan: You might be able to move to an interest-only loan for a short time to pay less each month. Just be aware that you’ll be paying a lot more in total repayments over the full term of the mortgage. Similarly, your lender may allow you to move to a fixed mortgage rate lower than the standard variable rate. However, these are generally only available at the start of a mortgage. At any rate, there’s no harm in talking to your lender to see what’s available.
If you’re a current homeowner struggling to repay your monthly loan, you are experiencing mortgage stress. Take whatever steps you have available to lower your monthly repayments as much as possible.
Article Sources
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Roy Morgan , “1.43 million Australians ‘At Risk’ of ‘mortgage stress’ in June 2023 representing 28.7% of mortgage holders,” accessed October 10, 2023.
About the Author
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