How Much of a Mortgage Payment Is Too Much?

How much of a mortgage is too much of a mortgage in today’s world, is a very different discussion than it was just a couple of years ago, and it’s certainly a different type of answer that perhaps your parents would have had. No longer is a mortgage of $100,000 considered substantial. Nowadays, mortgages of a million dollars or more are commonplace. With interest rates on the rise and costs of living continuing to rise, it’s more important than ever to find a way to manage our debt while still saving enough to provide for our families’ long-term security.

This is an important read for current borrowers, and borrowers to be.

In my capacity as a financial advisor, I have assisted a large number of customers in securing mortgage funding for anything from their very first residences to their retirement homes and investment properties. Clients often seek advice on determining a suitable mortgage amount as they attempt to strike a balance between prudent financial behaviors, and maximising their lifestyle objectives. Bank policies, one’s own financial position, and one’s long-term objectives are all relevant considerations here.

Most banks will extend credit for 4-5 times a borrower’s annual taxable income.

There’s far more to this and if anything, it’s overly conservative, but this means someone on $100k pa could get approval to borrow $500k.  Remember that interest rates, regulation, and changes to the banks’ credit appetite, can cause this rule of thumb to change. Never assume that because a bank is ready to give you a certain amount, that you should take out that loan in full too.

Mortgage payments should include about 30–40% of gross income for a good balance between lifestyle and financial goals.

If you don’t borrow enough, you’re not using your income to it’s greatest potential. If you borrow too much, the whole deck of cards could collapse.

This is just a starting point for making educated borrowing decisions, and it may change depending on interest rate fluctuations and individual circumstances.

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Keeping your mortgage payments within the 30%-40%  of your taxable income can help you weather the inevitable ups and downs in interest rates and home values*, ensuring you always have surplus income (or the capacity to create surplus income) in the future. To avoid the common pitfalls of borrowing too much during low-rate periods and selling at a loss when rates increase and prices fall, it’s important to plan ahead for potential interest rate swings by ‘conditioning your cashflow’. You can do this by simulating what your payments will be when rates are higher than what they are now (by overpaying) so that when interest rates rise, you have a pressure release valve (ie the ability to reduce payments to offset higher the  interest).

In conclusion, your desire to build wealth and your attitude towards risk should inform the mortgage amount you carry. Ideally you’ll spend between 30%-40% of your gross income on your mortgage payments. It’s normal remember though, for interest rates to fluctuate so it’s important to aim for the middle, or consider where your income will be in the future. Consider interest rate fluctuations and only borrow what you know you can pay back within your borrowing time horizon. Whether this is your first house or your fifth, it’s important to do your research and ideally seek out professional advice in order to make the best mortgage decisions possible.

*Let’s say you earn $100,000 per year and borrow $500,000 at 6.5% interest: Your monthly mortgage payment will be about 38% of your gross income.