How Much Do You Need To Earn To Buy A House?*
Here is the difference between how much the average home costs and what most people can afford, broken down by state and territory.
Home Affordability By State And Territory
|State/Territory||Median property prices||20% deposit||Monthly repayment||Annual gross income||Annual gross income to avoid mortgage stress||Difference|
(*Property prices are from CoreLogic’s November 2021 figures. Annual gross income is based on ABS average weekly earnings for May 2021. Annual gross income to avoid mortgage stress is an approximate figure. Repayment calculations are based on a 3% interest rate with an 80% LVR and a 30-year loan term.)
Can I Afford To Buy A House?
While your total income is one factor lenders will consider when assessing how much you can borrow, another key factor is your debt-to-income ratio. The maximum amount you can borrow is based on your income, current debts, and ability to repay the loan amount.
Your Debt-To-Income (DTI) Ratio
The DTI ratio is a key metric lenders use to determine if you can pay off your home loan comfortably without getting into financial hardships and mortgage stress.
It is calculated as the amount of money you earn divided by your total debts and liabilities.
As a simple example, let’s assume the total household income of a couple is $150,000. Assume they are looking at an $850,000 property and they’ve saved a 20% deposit ($170,000), so they need a loan for $680,000. Their total debts and liabilities beforehand are $10,000. So, adding that to the amount of the loan, their total debt would become $690,000. When we divide their total debt by their income, we get a DTI ratio of 4.60.
This means their total debt is 4.6 times their combined income.
You can use our DTI ratio calculator to check your own DTI based on any loan amount.
Tip: A DTI of 6 is usually considered high. Fortunately, lenders have different policies on what is an acceptable DTI ratio. Some lenders can accept borrowers with a DTI ratio up to 9. Our mortgage brokers know which lenders accept higher DTI limits. Call us on 1300 889 743 or enquire online.
Evidence Of Income
You will need to provide sufficient evidence of the income you’re earning. The specific types of income banks accept vary, but the important thing is that they look for a consistent income source. For example, if you’ve only received one bonus throughout your career, then the lender will not consider that part of your income.
Other Financial Considerations
The amount of deposit you’ve saved, your credit score and your repayment history are also assessed by lenders. A low credit score is a major concern for lenders, and if you miss payments frequently, that’s a red flag.
Costs Of Buying And Owning A House
Your mortgage repayments are not the only costs associated with buying and owning a home. There are upfront costs like stamp duty, building and pest inspections, and mortgage fees. You also have to consider the ongoing costs of owning a home, like insurance, water rates, council rates, and repairs and maintenance.
Do not forget to budget for these upfront and ongoing expenses when buying a home.
What Percentage Of Salary Should I Put Towards The Mortgage?
If you spend too much of your salary on your mortgage payments, then you won’t have much to save. This means a smaller financial buffer to use in case of emergencies, like medical expenses and job loss.
Mortgage stress is when you pay more than 30% of your income (before tax) on mortgage repayments. Lenders want to make sure you can comfortably repay your home loan along with your other liabilities without getting into financial hardship.
Tip: To be on the safe side and stay below the 30% mortgage stress threshold, adhere to the 28% limit. Your monthly mortgage repayments should not exceed 28% of your gross monthly income.
|Weekly income||Monthly Income||28%||30%|