Housing costs: the 30% benchmark and the 28/36 rule

For most households, housing is the largest expense: rent or mortgage, charges, insurance, local taxes. Because it is a long-term commitment, a housing cost that is too high affects the whole budget for years. Two benchmarks are widely used to judge whether it is reasonable.

The 30% benchmark

A common guideline is to spend no more than about 30% of your income on housing. Above that level, a household is often described as “housing cost burdened”: there is little left for other needs, savings and unexpected events.

The benchmark is approximate. In some cities, 30% is out of reach for many people; elsewhere, 20% is common. It is still a useful signal: the further above it you are, the more fragile the rest of your budget.

The 28/36 rule used by lenders

Mortgage lenders often use a more precise rule, based on gross income (before tax):

• 28%: housing costs (loan repayment, property tax, home insurance) should not exceed 28% of gross monthly income. This is the “front-end” ratio.
• 36%: housing costs plus all other debt repayments (car loan, student loan, credit cards) should not exceed 36% of gross monthly income. This is the “back-end” ratio, or debt-to-income ratio.

With a gross income of $5,000 a month, that means at most $1,400 for housing and $1,800 for housing plus other debts. Many lenders accept higher ratios, but staying within 28/36 leaves comfortable room for everything else.

Net or gross?

Lenders work with gross income; your budget works with net income. Our planner uses net income, which makes its alerts more demanding: 30% of net income is less than 30% of gross. Consider the alerts as indicative signals, not as a verdict.

An example

Mehdi earns $3,500 net per month and pays $1,200 in rent: 34% of his net income. Following the 50/30/20 rule, his needs are capped at $1,750. With rent alone taking $1,200, only $550 is left for utilities, food, transport and insurance — very tight. He has three options:

1. adopt the 60/20/20 split for a while, reducing his wants;
2. look for a shared or cheaper home when the lease ends;
3. increase his income, which is not always possible quickly.

What to include in housing costs

• rent or mortgage repayment (principal and interest);
• building charges and service fees;
• home insurance;
• property or housing taxes (divided by 12 if paid annually);
• for owners, a maintenance provision — often estimated at around 1% of the property value per year.

Utilities (electricity, water, heating) are usually counted separately, but they also depend on the size and quality of the home. A cheaper but poorly insulated home can cost more overall.

If your housing costs are too high

• Renegotiate: refinance a mortgage if rates have fallen, or compare home insurance.
• Share: renting out a room, where allowed, can change everything.
• Plan the next move: if the current situation is temporary, set a date and save for the move.
• Protect the rest: reduce wants first, and keep building an emergency fund, even a small one.

Frequently asked questions on this topic

Do these rules apply outside the United States?

The 28/36 rule comes from American mortgage lending, but similar limits exist in many countries: lenders commonly cap the share of income going to loan repayments, often around one third. Check the rules of your country and of your bank.

Should utilities be counted in housing costs?

Lenders usually exclude them, but your budget should not. Energy, water and building charges vary greatly from one home to another and can change the real cost of a cheaper rent.

Is it better to rent or to buy?

It depends on how long you plan to stay, local prices, interest rates and your deposit. As a rough guide, buying makes more sense the longer you stay, because purchase costs are spread over more years. Compare the full monthly cost of both options, not just rent versus loan payment.

Good to know — If you are close to the limits, keep a larger emergency fund: a high housing cost leaves less room to absorb a drop in income.

Before buying

Before signing a mortgage, test the future payment in your budget: for six months, put the difference between your current rent and the future payment (including charges, tax and maintenance) into savings. If you manage it without difficulty, the purchase is probably sustainable — and you will have increased your deposit.