9. Other Versions of the 30% Rule
Various interpretations of this rule exist. However, it’s commonly accepted that the rule applies to your after-tax income. It also applies to all of the items that go into your mortgage payment. Let’s say your property tax and home insurance premiums are all lumped in with your mortgage principal and interest. Now assume you make you make $6,000 a month, after taxes. The 30% rule says you don’t want to pay more than $1,800 a month for your monthly payment. (Thirty percent of six grand is $1,800, if you’re bad at mental math.)
If you normally pay you home insurance premiums and property taxes in an annual lump sum, you can still include them in the 30% rule. Just divide those annual payments by 12 and include the number in your calculations.
Of course, with surging house prices in many major North American markets, meeting the 30% rule is getting harder and harder. Many home buyers are needing to dedicate somewhere between 35-to-50% of their income towards their house costs.
8. Does the 30% Rule Make Sense?
Personally, I’m not a huge fan of the 30% rule. I think slotting almost a third of your income towards your housing costs is probably a bit steep. Depending on where you live, though, you might not have an option. In some areas, you might be lucky to keep it under 50% of your income. However, if you’re in that scenario, you should probably consider an area with a lower cost of living.
I also think you should put all of your housing costs into the equation. So add in your average monthly utility costs too. You should also factor in a cost for average annual maintenance or one-off repairs. You house may need a new roof every 15-to-20 years. Or a new appliance if an old one kicks the bucket. When you add those expenses to the mix, you’ll have even less to spend on your mortgage payment. That is, if you’re sticking closely to the 30% rule.