Proportion of income on rent/mortgage - and which would you choose?

Just wondering what proportion of your household income you spend on rent or your mortgage?

DH and I are trying to make the best decision about where to move next, and whether to rent or buy: either scenario looks like it'll cost us about 50% of our combined income. Does this sound like a lot?

In the renting scenario: we would be able to live in a suburb we want to live in near the beach and close to work, but it will be a small apartment. And the money does feel like "dead money".

In the buying scenario: we can own a nice house, but it will be out in the suburbs. There's a long commute to work and different lifestyle. While I'm sure we'd get used to it, we're only considering this as an option now because rent is so expensive, it's comparable to buying in another area.

What decisions have you made about owning vs renting, and where to call home?

Apparently 33% is optimal. Our rent is about 20%.

Honestly if it's going to be the same amount anyway, I'd buy. At least then you can get some equity and perhaps in another 5-10 years move closer to your preferred area ITMS. Though in saying that, not sure a bank would lend you a mortgage if it was 50% of your income..

We are on one income and our proportion is 50% as we also have an investment property that we have to top up as well and it works for us. I think financial advisors might recommend no more than 35%ish. Having said that it depends on your lifestyle habits too. We make it work because we moved to the country and our extra curricular stuff is cheap here so we don't spend as much on weekends etc. but we have also saved on petrol etc. We also don't eat out as much as we used to, not because we can't necessarily but we don't really want to (plus choices are limited!!) If you have a long commute to work, etc you need to factor it all in. Maybe do a budget and see what works for you once you take everything else into account. I would buy over rent but that is just me!

We buy because it's and investment as well as a home. Property increases in value, whereas rent doesn't "make" you anything. We do live further out of town than we would like, but we "deal" with the travel in order to get a larger sized property that fulfils out needs better and therefore our money works better for us, we more comfortable and we are investing in the long term, as a property makes money and increases in value. I sold my home for $120,000 more than I paid for it after 5 years! That helped us pay off DHs unit and more recently we have bought a new place, and would not have been able to afford the larger sized property if we had not had the extra invested in the house. We feel that the the long run we will have the capital in the house for retirement etc plus we can do whatever we want to the house and don't have to rely on others to fix things or make it look nice for us.

That's our rationale though.... Our family and friends live in similar circumstances and not too far, so we are still close to people that matter and our lifestyle. It might be different if we moved a long way from those things.

50% is definitely too high. Apparantly it's recommended not to exceed 35%. If you are paying out half of both your wages, you put yourself in a financially sticky situation if one of you became unemployed. I wouldn't do it and like previously mentioned, banks would most likely not loan on those figures.

I would always buy over renting, renting is just making someone else secure! My opinion of buying is you start at the bottom with a basic home that will increase in value, then you sell that to get up to the next level until you get what you want eventually. Not everyone is happy to do it that way though, but it does pay off in the long run. My first home was very cheap and with some work, quadrupled it's value. I am about to use it to buy something else as an investment.....

Haven't worked out the proportion of income, but our mortgage decision was made based on being able to service the loan on one income. Initially this was when I was a SAHM but we have since had other circumstances when I was forcibly without income, so as it happens our earlier decision-making paid off (so to speak).

TBH 50% sounds high. Does your next move involve moving a long way, or is it just different places within the one city? I'm asking because you need to factor in the potential for increasing income. Eg, if location 1 comes with more opportunities for promotion & pay rises, then maybe that's worth paying more to live than location 2. On the other hand, if location 2 is generally much cheaper to live (fresh food, electricity, transport, etc) then maybe that's the better whole-lifestyle decision to make, kwim?

As for commuting - this is a tricky one. To get the cheaper house in a pleasant suburb, we live further out. Benefits: clean air, sound of birds tweeting, larger house on nicer street than same amount of $$$ would get elsewhere. Downsides: 45-60 min commute (each way). Public transport vs high carparking costs. It's a minimum 30+ minute drive to get to pretty much any event. However, we are much closer to dH's work, so I wear the long commute & compensate by working a shorter week (and therefore am paid less $$$). On the balance, it works for us, but you might feel differently depending on the specifics of your situation & the locations you are looking at.

PS on renting vs buying: if you've only rented, it's easy to forget all the extra expenses you have to pay for when you own the house: council rates, sewerage, water rates, state government levies, building insurance, servicing & repairs to electricals/heating/cooling/hot water systems, repairs/maintenance on plumbing, roofs & gutters, gardening & fencing costs, termite/pest inspections, repainting & replacing curtains & floor coverings when they wear out, etc. If you have only held up the mortgage repayment figure against the rental amount, then you haven't truly compared the costs at all.

Housing stress is defined as spending more than 30% gross income on rent or mortgage. Extreme stress is spending over 50%. I wouldnt go with either option.

as a follow on from MD's post, estimate spending about 10% of the value of a property on maintenance per annum. This is on top of the mortgage, rates etc. Then there's the costs of purchasing - legal, taxes, fees etc.

I would buy over renting most any day, unless I was planning on never buying, or expected to have a relocation in under 3 years.

And I would err away from anything greater than 30% of your net income. You never know when there will be a redundancy, an hour cut, a bonus package ceases to exist, someone gets sick or injured, a baby pops up, interest rates go up, etc.

We figured out what could we afford (allowing for the fact that my salary would be increasing, but we'd be dropping DH's salary altogether when we had a baby) and then figured out what we really wanted in a home (x bedrooms, y bathrooms, z living areas, yard size (minimum/maximum/level of work needed), bath, dishwasher - or ability to put one in, no body corporate or shared driveway/yard under any circumstances,separate laundry, etc) and then we figured out where we could buy a place like that, for that amount of money ...

We also looked into things like whether the house needed much work, whether we were on a thoroughfare between a station and a park or pub, super close to anything we didn't want to be super close to (major power lines, a creek (foxes - I want chickens some day), a petrol station, etc).

THEN we went house hunting.

But the number crunching is critical - houses are expensive. Just like cars - sure, you save for the car, but then there's rego, insurance, petrol/gas, oil, servicing, upkeep and maintenance, etc. Houses are the same. Electrics, plumbing, trees, roof, aircon, windows... all the things you'd expect a landlord to sort out, you now have to do...

But for all that, you have the benefit of a slowly increasing ratio of ownership of the property, and as the value of the property increases, so too does your equity.

The value of our property has increased by about 50% in the 6 years since we bought. That's higher than I would imagine is standard, but if we were renting, we'd possibly have more savings - but also possibly would just have spent more of lifestyle, and be in no better a position ...

Not to mention factoring in the cost of insuring the home.
We are servicing a mortgage AND paying rent, but the mortgage is on a farm and the rent is cheap, through DP's boss (a dairy farmer who owns the house we're in and even if he sells this house he'll move us into anothery, just to keep DP on!). We're also planning on selling the farm this year and easing that payment stress (it's not a huge repayment, as we put up about 3/4 of the equity).
Anyway, having owned a house before buying the farm (we lived in a shed with minimal costs before moving to the rental) I can definitely see the appeal for renting long term! However, DP is handy and there are things we can't do ... but then, this isn't a house we'd readily own because of the work that would go into it, so we're happy to have all living and much less responsibility ;) It also helps that we're not on a contract, not through RE and DP fixes things around here and puts costs on the tab at the local hardware. Every situation is a little different and the big weigh up to be considered - including all those 'hidden' costs of owning a house.

Thanks everyone for your thoughts. It seems you are right about the 30% rule - I just googled and it seems 30% of your gross income "should" be be spent on rent/mortgage. Fortunately, I worked it out based on our after-tax income, so using the before-tax rule, we are sitting at about 35% - and that is with me only working casual while we are in baby-making mode. Once I go back to work, this ratio will decrease.

So, I feel better with that figure! Now just to weigh up the pros and cons of renting close to work/where we love/in a small and old unit OR buying further out in the suburbs/where love less/in a big house with a yard... Any more advice/experiences appreciated. Anyone made one decision or the other and lived to regret it?

Cost of commute will come into either repayments or rent, but whether renting or buying if you are further out on a bigger site you can grow more of your own veggies in raised beds ;)

We were 60% of joint income, stressful when I lost my job only.

Now remortgaged on 35% and comfortable. But we have low commute costs and enough left over that I can go back to parttime soon. It isn't the %, it's the lifestyle and money left over each month.

All of dh's income goes on mortgage however we pay double our repayments so technically it's 50% of his. We found doing it this way helps as we can redraw if we need money quickly but it also reduces the interest we pay by putting the extra onto our loan.

I pay 45% of my income in rent. If I could buy I would. I pay 45% because I have no other choices. I searched for months trying to find another option. It's a landlord's market.

Our 50% figure is post tax so more like 40% before tax too.

We pay 50% of our post tax income. The stress is huge!!!!!

I would always buy over rent but I've been able to live in or near the area I want..... Hugs its a huge decision

Ours is 50% (after tax) too, but if we ran into trouble we could sell an investment property with high equity and pay 50% off our mortgage.

I would always say buy not rent if you can. Even sacrifice some things in a home (like commute or area) just to get into the property market, so when you're ready to move on/up/or down, the equity buys you what you've been missing.

Our motto is to do it tougher while young and it will hopefully pay off, giving us and the kids a brighter future. It's worked for us so far. Not without stress.... But we can handle it and it's a choice.

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It isn't the %, it's the lifestyle and money left over each month.

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I agree with this. If you earn $50000 a month then it would be pretty easy to live on half of it! I prefer to calculate how much we need per month for all the costs BESIDES rent/mortgage then figure out how much we can afford to spend on rent mortgage based on that. If what you need to live on is only 40% of your income then why not spend 60% on rent/mortgage? Whatever you can afford and works for you.

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I agree with this. If you earn $50000 a month then it would be pretty easy to live on half of it!

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Unless you lose your job and then you're totally up the creek....

I think is very dependent on individual situations - for example if you are reliant is only one income and you are talking 40% of it or 30% etc if that income stream disappears then you are in trouble whether is 30% or 40%. If you have for example a mortgage that is 50% of your income but you only actually spend 20% and save the rest (additional payments on your mortgage for example) then you are in a better situation if your income declines than someone who has a mortgage of 30% of their income but spends every penny of the rest of the 70%.

It also depends on how variable your income is likely to be - our mortgage started as about 40% of my income alone (DH income was not alot) but when I was on maternity leave or had no job at times it went up to 80% of income (as I didn't have one) - but that was short term thing.

I personally wouldn't live somewhere I didn't want to just to buy a house, if I was considering somewhere a bit different to current I would rent in that area first just to confirm could live with it - in your example you would probably save money renting in that area first too. Also is worth considering you can buy a house and not live in it, as a form of investment too, buy somewhere as the investment and then rent where you actually want to live.

I think renting long term before buying can be a valid strategy, if you actually save the money you would have spent on buying, and put it towards a deposit. Depending on where you rent vs where you buy I think you can actually save more money in the short-term doing this than buying somewhere and intending to trade up in 8 years for example. The past 10 years growth in house prices I don't believe will continue for the next 10 years - the growth will be slower in many areas.

Honestly I would be surprised if a bank approved you for a home loan when such a large proportion of your wages is needed to service the loan (and if you approved would love to know what bank it is so we can get on that one).
Personally I would choose neither situation, I would prefer to live somewhere where I was happy, less money was needed to survive and more money to live and love life. But that's me

% income is less important to a bank than the LTV rate. You have enough deposit, they make more than their money back should you default, they'll agree to lend you the money.

Based on my ft wage, we pay 25% of our after tax income on rent. While I'm on mat leave it works out to be 35% of after tax income. We honestly couldn't afford to pay much more in rent. If we were to buy, we would not be able to afford the same quality of house that we live in while renting so we choose to rent.