How Much House Can You Afford?

The 28/36 Rule

Two ceilings, both calculated from gross monthly income, meaning your pay before tax and deductions.

The first covers everything you pay to live in the home. The second covers that figure plus every other monthly debt payment: car loans, student loans, credit card minimums, personal loans, any instalment plan.

Whichever ceiling binds first is your real limit. Someone with no other debt is limited by the 28% figure. Someone paying 500 a month on a car loan hits the 36% ceiling well before the 28% one, and their housing budget shrinks accordingly.

Worth being clear about what this rule is. It is not a law and not a guarantee of approval. It is a guideline lenders use to judge risk, which means it is calibrated to the point where they expect to get paid back, not the point where your life stays comfortable.

What Counts as a Housing Cost

This is where most people miscalculate, and the error runs in an expensive direction.

The 28% ceiling is not the mortgage payment. It covers the loan principal and interest plus property tax, building insurance, and where applicable, mortgage insurance and any association or society maintenance charges. Lenders often abbreviate the bundle as PITI.

Those extras are not rounding errors. Depending on where you live, property tax and insurance commonly add 20% to 35% on top of the loan payment. A person who budgets their entire 28% for principal and interest, then discovers tax and insurance on completion, has overshot by roughly a quarter.

Subtract the extras first. Whatever is left is what you can actually spend on the loan.

Worked Example, Start to Finish

These figures work in any currency, so read them as rupees, dirhams, dollars, or pounds.

Situation: Gross monthly income 5,000. Existing debts of 400 per month for a car loan. Interest rate 8%, term 25 years, 20% down payment.

Step 1: Apply both ceilings

• 28% of 5,000 = 1,400 for housing
• 36% of 5,000 = 1,800 for all debt
• 1,800 minus the 400 car loan leaves 1,400 available for housing

Both ceilings land in the same place here, so the housing budget is 1,400. Had the car loan been 600, the second ceiling would have cut the housing budget to 1,200.

Step 2: Remove the costs that are not the loan

Estimate 300 per month for property tax, insurance, and maintenance charges. That leaves 1,100 for principal and interest.

Step 3: Convert the payment into a loan amount

Working backwards through the standard amortization formula at 8% over 300 months, a payment of 1,100 supports a loan of roughly 142,500.

Had you skipped step 2 and used the full 1,400, the formula would have suggested a loan near 181,000. That gap of nearly 39,000 is the cost of forgetting about tax and insurance.

Step 4: Add the down payment

With 20% down, a 142,500 loan buys a property priced around 178,000, and you need roughly 35,600 in cash for the deposit, plus closing costs on top.

So a household earning 60,000 a year can responsibly look at homes near 178,000, which is about three times annual income. That lands neatly inside the traditional multiple, which is a good sign the arithmetic is sound.

The Stricter Rule: 25% of Take-Home Pay

A competing guideline caps housing at 25% of net monthly income, meaning pay after tax and deductions rather than before.

This produces a noticeably smaller number, and I think it is the better rule for most buyers. The reason is simple: you cannot spend gross income. If roughly a quarter of your pay disappears to tax and social contributions before it reaches your account, then 28% of gross is closer to 37% of what you actually receive. That is a lot of your real money committed to one fixed obligation for two or three decades.

On the example above, if 5,000 gross becomes 3,900 net, the 25% rule allows 975 for all housing costs, against the 1,400 that 28/36 permits. The stricter figure buys less house and leaves considerably more room for everything that goes wrong.

You can work out your own net figure with the take-home pay calculator, and the guide on gross versus net salary explains what disappears in between.

The Income Multiple Shortcut

For a rough sanity check without any arithmetic, total property value should generally sit between three and five times annual household income.

Three times is conservative and comfortable. Five times is stretched, and only sensible with a large down payment, secure income, and low interest rates. Anything beyond five times is where households become fragile to a rate rise or a lost job.

Use this as a cross-check rather than a primary method. If your detailed calculation says you can afford six times your income, the detailed calculation has gone wrong somewhere.

What These Rules Leave Out

Every affordability guideline is a snapshot of your current situation, and homes are a twenty-five year commitment. Four things routinely break the snapshot.

Cash you need beyond the deposit. Closing costs, legal fees, stamp duty or transfer tax, valuation fees, and moving costs typically add several percent of the purchase price, payable in cash on top of the down payment.

Maintenance. A widely used planning figure is 1% of the property value per year for repairs and upkeep. On a 178,000 home that is 1,780 annually, or around 148 a month that no lender asked you about.

Rate changes. On a floating-rate loan, a two-point rise on a 142,500 balance adds meaningfully to the monthly payment. Test your budget against a rate two points higher than today’s before committing.

Everything else in your life. The 36% ceiling counts debt, not childcare, school fees, medical costs, or supporting family members. Lenders do not model these. You have to.

Frequently Asked Questions

Is the 28/36 rule based on gross or net income?

Gross, meaning income before tax and deductions. That is precisely why it feels generous in practice, and why the competing 25% of take-home pay guideline exists. If you want a conservative number, run both and plan around the smaller one.

What if I have no other debt at all?

Then the 28% housing ceiling binds and the 36% total ceiling is irrelevant. You get the full housing allowance. Be careful about taking on a car loan shortly before applying, since it immediately reduces how much house you qualify for.

Does the rule work outside the United States?

The ratios travel well because they describe a relationship between income and fixed obligations rather than any national tax code. What changes by country is what falls inside the housing bundle, since property tax, stamp duty, insurance requirements, and society maintenance charges differ enormously. Adjust the deduction in step 2 to match local costs.

How much deposit do I actually need?

Twenty percent is the common benchmark, and it usually avoids mandatory mortgage insurance. Many lenders accept less, sometimes 5% or 10%, at the cost of insurance premiums and a higher rate. Putting down less raises both your monthly payment and your total interest.

Should I borrow the maximum I am approved for?

Approval tells you what a lender is willing to risk, which is not the same as what you should spend. Borrowing at your ceiling leaves no room for a rate rise, a job change, or a boiler replacement. Most people who regret a purchase borrowed near the top of their range.

Do rising interest rates change how much house I can afford?

Substantially. Because payment scales with rate, the same monthly budget buys a smaller loan when rates rise. A payment that supports 142,500 at 8% supports noticeably less at 10%, which is why affordability shifts even when incomes and prices hold steady.

Does rental income or a second income count?

Lenders usually count a co-applicant’s income in full and treat documented rental income partially, often at 70% to 75%, to allow for vacancy. Informal or undocumented income generally does not count at all. Check what your lender accepts before building it into your plan.

The Bottom Line

Work out both ceilings, take the lower one, subtract property tax and insurance before you size the loan, and cross-check the result against three to five times your annual income. Then run the whole thing again using 25% of your take-home pay and see how different the two answers look, because that gap is the margin between what a lender will lend and what you will comfortably repay. Convert your final payment figure into a loan amount with the mortgage calculator, and test it once more at a rate two points higher than the one you were quoted.