INVESTING STRATEGY
Home loan repayments to income ratio
Hey - My partner and I recently purchased a property after much deliberation about how much we should borrow (and where, and how old, …). I’ve heard that home loan repayments shouldn’t exceed about 30-35% of your gross income. Does anyone know where that figure comes from and what assumptions were made? Is there a calculator that can give a more accurate percentage? I’m guessing there’ are assumptions around age, relationship status, income, dependants, location, etc. Obviously a bit late for us as we’ve already bought! But I am curious as our ratio is quite a bit higher. Thanks.
2 Comments
about 1 year ago
Hey Stuart.
Like most metrics you hear bandied about «save 10% of your income» etc, that figure is completely made up.
The general idea is that if you spend too much on your home, you won’t have enough money for other things and so you’ll be in a state of financial stress.
While it makes some sense, the figure is arbitrary. The fact is, everyone’s situation is different. You essentially want enough breathing space so you can still have a good life and ideally save and invest as well. As long as you can maintain that, you’re good.
You also may decide that you want to spend more of your income on housing because that’s something which is very important to you. And you may happen to not be all that interested in spending on cars, or holidays, or restaurants etc.
Of course there may be periods where rates are higher (like now) and repayments are painful for a while. But on average, and over time, if you haven’t overdone it, then your home loan repayments should stay a comfortable level. And as your income goes up over time, you’ll hopefully have an improving situation giving you more cash to invest or pay down the loan.
So don’t worry about what the right % is, it’s all nonsense. Sounds like you’ve already been thoughtful about it which is the main thing :)
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