How Much of Your Income Should Your Mortgage Be?

Edited: 17th April 2026

TL;DR

The 28/36 rule suggests keeping housing costs below 28% of gross monthly income and total debt below 36% — in Australia, mortgage stress is broadly defined as spending more than 30% of income on repayments, at which point financial buffers erode quickly.
Your debt-to-income ratio — total monthly debt payments divided by gross monthly income — is a key metric lenders use to assess borrowing capacity, with 36% or below generally considered comfortable and anything higher narrowing your loan options.
Mortgage affordability depends on more than income: deposit size, existing debts, interest rate sensitivity, and income stability all shape what you can sustainably borrow — the maximum a lender will approve and the amount that genuinely suits your budget are often meaningfully different numbers.
Stress-testing your repayments at a rate 2% above today’s rate before committing is essential — a mortgage that is manageable now but unaffordable after a rate rise creates exactly the kind of financial pressure that leads to mortgage stress.

Buying your first home is one of the most significant financial decisions you’ll ever make, and one of the first questions to ask is: how much of your income should your mortgage be?

Knowing how much of your income goes toward housing can help you stay financially stable and avoid stretching your budget too far. However, mortgage affordability in Australia is about more than just a single number. It involves balancing your home loan repayments with your everyday expenses, savings goals, and other financial commitments.

Because mortgage repayments often continue for decades, it’s important to ensure your loan remains manageable even if circumstances change. Rising interest rates, employment changes, or higher living costs can all affect your ability to comfortably maintain repayments over time.

Financial planners, lenders, and a finance broker in Melbourne often refer to affordability guidelines and ratios when estimating how much of your income may reasonably go toward housing costs.

In this guide, we’ll walk through the common rules used to assess mortgage affordability and the key factors that influence how much you may be able to spend on a home.

What Is a Mortgage Payment?

A mortgage payment is the regular payment made to your lender to repay the home loan used to purchase a property. Most borrowers make these payments monthly, although some lenders allow fortnightly or bi-weekly repayments. Mortgage repayments usually consist of two main components:

Principal

The principal is the amount originally borrowed from the lender. Each repayment gradually reduces this loan balance over time.

Interest

Interest is the cost of borrowing money. Interest is calculated using the remaining loan balance and the interest rate applied to the mortgage.

For principal-and-interest loans, a large portion of each repayment in the early years goes toward interest rather than reducing the principal. As the loan balance decreases over time, a greater share of each payment is applied to the principal. This gradual shift is part of the amortisation process.

Other housing costs beyond the mortgage payment

While the mortgage repayment itself is the largest housing expense for most homeowners, it is not the only cost associated with owning property. Beyond the mortgage itself, homeowners should set aside money for costs like:

Property taxes or council rates
Home insurance
Repairs and maintenance
Utilities and other housing-related costs

These costs may not be included in the loan repayment itself, but they still affect the total portion of income required to maintain homeownership.

When evaluating affordability, consider total housing costs, not just the mortgage repayment.

Mortgage to Income Ratio: Common Rules

To estimate how much income should reasonably go toward housing costs, several budgeting guidelines are commonly used. These rules are not strict requirements, but they serve as a useful starting point.

The 28/36 Rule

The 28/36 rule is one of the most widely referenced guidelines for evaluating mortgage affordability.

According to this rule:

Housing costs ideally stay below 28% of your gross monthly income
Total debt payments should stay under 36% of gross monthly income

Housing costs typically include:

Mortgage principal and interest
Property taxes
Home insurance

The second part of the rule accounts for all debt obligations combined, including:

Credit cards
Car loans
Personal loans
Student loans

The purpose of this rule is to ensure that mortgage repayments remain manageable alongside other financial responsibilities.

Although lenders today use more detailed financial assessments, the 28/36 rule remains a useful benchmark for buyers evaluating potential loan sizes.

The 50/30/20 Budget Rule

Another helpful framework for evaluating housing affordability is the 50/30/20 budgeting rule.

This model divides your after-tax income into three categories:

50% for essential needs
30% for discretionary spending
20% for savings and debt repayment

Housing expenses fall within the “needs” category, alongside other essential costs such as groceries, utilities, and transportation.

The advantage of this framework is that it forces borrowers to consider the broader financial picture. Even if a mortgage payment technically fits within your income, allocating too much money to housing can reduce your ability to save, invest, or handle unexpected expenses.

Debt-to-Income Ratio (DTI)

Your debt-to-income ratio (DTI) shows how much of your monthly income is spent on debt repayments.

Lenders use this ratio to assess whether a borrower has sufficient income to take on additional debt.

The formula for calculating DTI is simple:

Total monthly debt payments ÷ Gross monthly income

For example: If your monthly income is $6,000 and your total debt payments equal $2,000, your DTI ratio would be 33%.

Many lenders consider a DTI of around 36% or lower to be a comfortable level of debt.

A lower DTI indicates that a borrower has more available income after meeting debt obligations. This improves the likelihood of mortgage approval and reduces the risk of financial strain.

Borrowers with higher DTI ratios may find it more difficult to qualify for loans or may need to borrow smaller amounts.

Understanding Mortgage Stress

Mortgage stress occurs when housing costs take up such a large portion of income that it becomes difficult to cover everyday living expenses.

In Australia, mortgage stress is commonly defined as a household spending more than around 30% of its income on mortgage repayments.

When housing costs exceed this threshold, borrowers may experience financial pressure because there is less money available for:

Household expenses
Savings and investments
Emergency costs

Mortgage stress does not necessarily appear immediately. It often develops gradually as circumstances change.

Common causes include:

Rising interest rates
Increased living expenses
Job loss or reduced income
Taking on additional debt

When a mortgage payment consumes too much of a household’s income, even small financial disruptions can create significant strain.

Factors That Affect How Much Mortgage You Can Afford

Mortgage affordability depends on more than just income. Several financial factors influence how much of your income can realistically support a first home loan.

Understanding these factors helps buyers choose a loan that fits their long-term financial situation.

Income Stability

Income stability is one of the most important considerations when evaluating mortgage affordability.

Borrowers with stable employment and predictable income can usually plan mortgage repayments more confidently. In contrast, individuals with variable income, such as freelancers or commission-based workers, may experience fluctuations in earnings.

In these situations, maintaining a larger financial buffer can help ensure that mortgage payments remain manageable during lower-income periods.

Existing Debt

Existing debts can reduce the portion of your income available to support mortgage repayments.

Common examples include:

Car loans
Personal loans
Student loans
Credit card balances

The more debt a borrower carries, the less borrowing capacity they may have when applying for a mortgage.

Reducing existing debt before applying for a home loan may improve affordability and borrowing capacity.

Deposit Size

The size of your deposit plays an important role in overall mortgage affordability.

A larger deposit generally means borrowing less, which may reduce monthly repayments and the total interest paid across the life of the loan.

For example, purchasing a property with a 20% deposit means borrowing only 80% of the purchase price.

Interest Rates

Interest rates have a direct effect on mortgage repayments.

Even small increases in interest rates can significantly increase the cost of a loan over time.

Because mortgages often last 20 to 30 years, borrowers should consider whether they could still comfortably afford repayments if interest rates rise in the future.

Signs You May Be Spending Too Much on Your Mortgage

A mortgage that stretches your finances too far can affect your overall financial wellbeing. There are several warning signs that housing costs may be consuming too much of your income.

Limited Savings

If your mortgage leaves little room to save money each month, it may be a sign that housing costs are too high.

Savings are essential for emergency expenses, home repairs, and long-term financial goals.

Reliance on Credit

Relying on credit cards or loans for everyday expenses, such as groceries or bills, may suggest that housing costs are placing pressure on your budget.

Financial Stress From Unexpected Costs

Homeownership often includes unexpected expenses, such as repairs or maintenance.

If even small unexpected costs create financial pressure, it may suggest that mortgage repayments are stretching your budget.

Ways to Reduce Mortgage Stress

If you are concerned about affordability, several strategies may help reduce mortgage-related financial pressure.

Buy Within Your Budget

Choosing a property that comfortably fits within your financial limits can significantly reduce long-term stress. Buying a home that requires smaller repayments may provide greater financial flexibility.

Increase Your Deposit

Saving for a larger deposit may help reduce the loan amount required and the size of your monthly repayments. Lower borrowing levels also reduce the total interest paid over the life of the loan.

Refinance When Appropriate

Refinancing may allow borrowers to access lower interest rates or better loan features. Lower interest rates can reduce monthly repayments and improve affordability.

Maintain an Emergency Fund

Maintaining emergency savings that cover several months of living expenses makes it easier to keep up with repayments during periods of uncertainty.

How Lenders Calculate Borrowing Power

When applying for a first home loan, lenders typically review your financial position to estimate how much you may be able to borrow. This process is known as a borrowing power assessment.

Income Assessment

Lenders review your income to ensure you can meet mortgage repayments. This may involve verifying employment, reviewing payslips, or examining tax returns for self-employed borrowers.

Living Expenses

Lenders assess your living expenses to determine how much income remains available for mortgage payments. Expenses may include housing costs, groceries, transportation, insurance, and other regular spending.

Credit History

Your credit history provides insight into how you have managed debt in the past. A strong credit record with consistent repayment history can improve your chances of mortgage approval.

Interest Rate Stress Testing

Many lenders assess whether borrowers could still afford repayments if interest rates increase. This type of stress testing helps ensure that loans remain manageable even if economic conditions change.

How Much Mortgage Can I Afford in Australia?

Understanding mortgage affordability rules is helpful, but many buyers still want to know how to translate those guidelines into a realistic loan amount.

Calculating how much mortgage you can afford means looking at your income, expenses, and potential repayment scenarios. Instead of focusing only on the maximum amount a lender may approve, it is often more useful to determine the repayment level that fits your budget comfortably.

Step 1: Calculate Your Monthly Take-Home Income

Begin by calculating your total monthly income after tax, which may include:

Salary or wages
Additional income sources
Household income if buying with a partner

Using after-tax income provides a clearer picture of how much money is actually available to cover expenses each month.

Step 2: Identify Your Essential Monthly Expenses

Next, list your regular living expenses. These may include:

Groceries
Utilities
Transportation
Insurance
Childcare or education costs
Existing loan repayments

Understanding your current spending helps determine how much income remains available for housing costs.

Step 3: Estimate Your Total Housing Costs

Mortgage repayments are only one part of homeownership. When calculating affordability, you should also consider other housing expenses such as:

Property taxes or council rates
Home insurance
Maintenance and repairs
Utilities

Adding these costs to your estimated mortgage repayment provides a more accurate picture of your total housing budget.

Step 4: Stress Test Your Repayments

Interest rates can change over time, which means mortgage repayments may increase in the future.

When estimating affordability, it is useful to calculate how repayments would look if interest rates were slightly higher than today. This stress test helps ensure that your mortgage remains manageable even if market conditions change.

Step 5: Leave Room for Savings and Financial Flexibility

A comfortable mortgage should still allow room in your budget for savings and unexpected expenses.

If your housing costs consume nearly all of your available income, it may indicate that the loan size is too large. Maintaining financial flexibility can help protect your budget against future changes.

Making Your Mortgage Work for Your Budget

Determining how much of your income should go toward your mortgage is a crucial step when planning to buy your first home.

While guidelines such as the 28/36 rule, the 50/30/20 budgeting framework, and maintaining a healthy debt-to-income ratio can provide useful benchmarks, the most important factor is choosing a loan that fits comfortably within your overall financial situation.

A mortgage should support your long-term financial goals rather than restrict them.

If you’re considering buying your first home and want a clearer understanding of how much you may be able to borrow, speaking with the mortgage broker team at Shern Advisory can help you evaluate your options and plan your next step with confidence.

Disclaimer: The information in this article is general in nature and does not constitute financial or credit advice. It does not take into account your personal circumstances. Please seek advice from a qualified professional before making any financial decisions.

Frequently Asked Questions (FAQs)

Most guidelines suggest keeping mortgage repayments at around 28% to 30% of gross monthly income, though the right amount will vary depending on your expenses, existing debts, and financial goals.

You’ll see both versions used. Some people apply it to gross income as a rough benchmark, while others prefer after-tax income because it reflects what you actually take home, so the right approach may depend on how you budget.

For most households, yes, especially if repayments at that level leave little room for savings, rate rises, or unexpected costs.

It can be a warning sign that your budget has less flexibility, but it depends on what debts are included and how stable your income and expenses are. Lenders assess affordability using their own serviceability models, and thresholds may vary by lender and policy.

It depends on the interest rate, loan term, and whether the loan is principal-and-interest or interest-only. A repayment calculator can show a more accurate figure, and the final repayment may also be affected by fees and product features.

There is no single income figure because it depends on the rate used, your living expenses, existing debts, and the lender’s servicing approach. Some lenders may also assess repayments at a higher “buffered” rate, which can reduce borrowing capacity.

Your credit report can influence whether a lender will approve an application and on what terms, but borrowing capacity is still heavily driven by income, expenses, and existing liabilities. Credit reporting and lender criteria can vary, and policies may change over time.

Single borrowers often rely on strong budgeting, limiting other debts, and keeping a meaningful savings buffer because there is only one income supporting repayments. Some may choose a smaller loan amount, a different property type, or longer-term planning to improve affordability, depending on lender policy and their circumstances.