05 Oct 2022

The mortgage rule you've never heard of but could change your life

The mortgage rule you've never heard of but could change your life

If your mortgage is costing you more than any of these numbers, according to the rule, you’re over borrowing

Buying a house is a big decision and from a financial perspective you want to get it right. And what I mean by getting it right are two things.

The first is, if you lost your job for more than six months, do you have savings or other means that would allow you to continue to make the monthly repayment and secondly, is the mortgage your taking on affordable.

And the most well-known rule of thumb in the financial services sector, to determine whether it’s affordable or not is known as the 28/36 rule.

Using something like this can be useful because it gives you an excellent reference to measure whether the mortgage, you’re taking on is too big or not.

A question I’m frequently asked, particularly by first time buyers, is how much of their income should they set aside for mortgage repayments.

Is it based on net or gross monthly income and should they include all payments associated with the mortgage or just their mortgage payment?

I’m in the former camp but let’s see how the 28/36 rule works in both instances and whether it’s something you should follow.

Okay, what the 28 refers to is the % of your gross income that you should set aside for mortgage payments. That’s the upper limit.

And 36 is the maximum % of your gross salary that should be set aside to make mortgage and any other debt repayments you have.

If your mortgage is costing you more than any of these numbers, according to the rule, you’re over borrowing.  And these numbers don’t include any other costs associated with being a homeowner i.e. insurance, assurance, maintenance, property tax etc.

Let’s look at the 28/36 rule in practice and see what it looks like, and whether it’s something you should be guided by.

If you’re single and earning €50,000 per year, and have no loans, according to the rule, you should be planning for a mortgage with monthly repayments of €1,167. And that amount translates into a mortgage of €276,540 assuming a term of 30 years and an interest rate of 3%.

The problem with this output is twofold (a) using the Central Bank income multiple of 3.5 times gross income, you’ll only qualify for a mortgage of €175,000 and even if you are granted an exemption, it won’t be much more than this amount, so borrowing €276,540 isn’t going to happen and (b) your mortgage is going to be paid from after tax income, and when you work out what €1,167 is as a % of your net take home pay, in this instance it’s 38% which in my opinion is too high.

Clearly the 28/36 rule has its limitations and if used could have the opposite effect from what its initial good intentions were.

It could give people a false sense of the amount they can borrow and worse still, lead them to taking on more of mortgage than they can afford.

I want to change the 28/36 rule, so I decided to create my own because I want to work off %’s of net income rather than gross.

Why use gross income in the first place? Why factor in money you’re giving away in taxes or towards your pension? You can’t use that money to pay a mortgage, right?

So, the rule I’ve created is the 30-34-39 rule, and I’ll explain what I mean and what my logic behind these numbers are.

Okay, first off, I think a good number to use exclusively for mortgage repayments is 30% of your net monthly income.

Calculating the amount, you can borrow with reference to this number is more realistic in terms of what you’ll actually get approved for and also this number will show you exactly what’s going to be debited from your account each month.

If we go back to that person earning €50,000, their net monthly income is c. €3,067 and applying 30% for mortgage repayment, means the amount they should borrow is €218,000.

Now they have an amount that allows them to continue with regular savings each month, are able to fund retirement accounts, go on holidays every year, have a life etc. They won’t be held hostage to mortgage repayments that are excessive, and it won’t hold them back in other areas of their financial and non-financial life either.

In a previous article, I wrote about how you should compartmentalise your monthly income into three different sections using the 50/30/20 rule.

And mortgage repayments fall under the 50 category, where you assign 50% of your monthly income to costs like mortgage repayments and insurances, utility costs, groceries, transportation, clothing, loan repayments and so on.

By assigning 30% to mortgage repayments, you’re leaving 20% that can be used to fund these other areas and believe me, you’ll need to.

When I analyse what people typically spend each month on insurances, clothing, food, loan repayments and so on, it’s rare that when combined they’re under 20%.

Now if you want to get a number that includes those other associated costs I just referred to, then I would use 34% as your rule of thumb. I’m adding 15% to your mortgage repayment to cover them.

By using this number, you’re getting a good look into what your future total monthly house related costs are going to be without having to get bogged down in too much detail, trying to work out what their individual cost is.

And if you have any other debt, when combined with your mortgage repayment and other costs associated with your property, they shouldn’t exceed 39% of your net monthly income.

Okay, let me summarize my rule for you and what % of your net monthly income you should be setting aside:

  • 30% Mortgage repayments only
  • 34% Mortgage repayments and other associated housing costs
  • 39% Mortgage, associated housing costs and any other loan repayments

The 30-34-39 rule is a useful guide which I believe will prevent you from over borrowing and you’re much more likely not to, struggle with making monthly repayments if you follow the parameters I set.

The trade-off of course, is trying to find a property, in a location you’d like to live in, that fits into these numbers. And that may mean, you have to delay your purchase because you have to work on increasing your savings and having a bigger deposit, working on becoming more valuable to your employer and increasing your income, paying off what debt if any you have etc.

And you know, there’s nothing wrong with saying, I need to wait another year or two before I buy.

One of the reasons people get into difficulty is because they take on too much mortgage, and that certainly happened in the past where people borrowed and were allowed to, multiples of their income when clearly it was too much.

The Central Bank lending guidelines which limits the normal amount you can borrow has certainly helped, but you need other reference points that actually relate not just to how much you can borrow, but how that amount translates into a monthly repayment and impacts not just your monthly cashflow but other areas of your finances, and I think the 30-34-39 rule will help in this regard.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at or

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