What portion of monthly salary should go to mortgage?

Question

I am in the market to buy a house. I would like to know what economists would suggest on how much a person in his late 30's should spend on a house? - I mean, the percentage of his gross income.

Answer 1

Easy, as much as you can afford!,

At the minimum I would suggest no less than 25% but the more you put on, the less interest you will pay in the long run and you will be mortgage free years ahead of schedule!

When we brought our first house we put every cent of savings we had on to the deposit (dont be fooled going for the minimum payment, it adds thousands to the interest!)
we also went for the shorter term (25 years instead of 30) to help force us to pay it off quicker (you can always re-mortgage if you get in the poo).
And then we proceeded to put 50% of our income on it for the first 3 years, we have now lowered our payments as we are traveling and renting the house out, but once we return we will put the payments back up.

Answer 2

Investor guidelines suggest that your total housing payment PITI (principal, interest, property taxes, and fire insurance) should approximately 28% of your gross monthly income. This is, however, a guideline and not a rule. You can be approved for a higher payment to income ratio if there are sufficient compensating factors, for example: lack of child rearing expenses, limited credit usage (creating an ability to dedicate a larger amount to your housing payment), probability of increases in income, proven ability to support a higher housing payment (lack of "payment shock"), long term stable employment, etc..

Lenders use the payment to income test and the total debt to income test, which is your propsed new PITI and total of other minimum monthly payments as compared to your monthly gross income, when qualifying borrowers for financing. The debt to income guideline is 36%.

With the advent of automated underwriting all factors are automatically considered. I have seen loan approvals for loans with ratios as high as 35/55 and heard of ones even higher. A great deal depends on the quality of your credit and the loan to value (how much you put down on the house).

The thing to remember here is that you are the one who is going to have to live with these numbers. Look at your lifestyle and your monthly expenses and figure out where you are going to be comfortable having your debt service on the home you choose.

Your choice of loan type can also influence your payment. The payment of a fully amortized loan will be higher than an interest only choice, an ARM will be lower than the conventional fixed rate.

You have a multitude of choices here, do your homework and make certain you know and communicate your goals to your loan officer so that they may explain all of your options and enable you to choose what suits you best.

Answer 3

There are a couple of answers to this, one is the amount that lenders will approve, but the better one is YOUR answer.

Let's work with an income of $4000 per month and say 25% is the figure. That's a payment of $1,000 per month, and just for simplicity let's pretend it's all interest, so it's tax deductible. Let's also pretend that the other $3,000 is all spent, so there's no savings.

At the end of the year you've spent $12,000 on deductible interest, and if your tax rate is 25% (because it makes the math easy) you save $3,000 on your taxes.

Now let's say that the payment is only $900 in interest, and you save the other $100. At the end of the year you've paid $10,800 in interest, so you now save $2,700 in taxes. Add that to the $100 per month and you now have $3,900.

So, my answer to your question of what portion should go to mortgage, "as little as it takes to buy a home you are satisfied with".

Answer 4

You should not spend more than 40% of your gross income ,and combined with your other debts you should not spend more than 32% of your income.These guidelines were set by Canadian Mortgage Housing Corporation(insured mortgage).By following these guidelines you will not be pressed into financial hardship and will be able to carry on a normal life without financial stress or be house poor.Some companies allow higher rates and insure it themselves(default rate is around 30%).

Answer 5

I believe that would be 25%

Answer 6

25% and your covered for any unforeseens.