How much should you pay on your mortgage?

ONE in two households are spending more than 30 per cent of their income to pay their rent or mortgage repayments.

Despite interest rates remaining at record lows, many borrowers have taken on huge home loan debts and, with little to no recent wage growth, it’s taking a large chunk out of their household budget.

In lender ME’s latest biannual Financial Comfort report, which gauged the finances of more than 1500 Australian households, it revealed 56 per cent of households are contributing about one third of their income to keep a roof over their head.

Industry experts believe contributing more than 30 per cent of income deems a person under financial stress.

Rising Tide Financial Services’ director Chris Browne said borrowers should be careful not to overstretch themselves financially.

“Make sure our mortgage repayments only represent 20 to 30 per cent of your household income so you can still enjoy the ride along the way,’’ he said.

“If that seems impossible consider buying a better quality property with friends or family to make your repayments more affordable.”

Figures show for a customer earning $100,000 per annum with a $300,000 30year home loan, 30 per cent of income would equate to $1834 per month. A customer putting 20 per cent of income towards repayment would be paying $1223. This is based on a home loan rate of 3.74 per cent.

On the flip side, those under extreme stress – who contribute more than 60 per cent of their income – has fallen notably, from 8 to 4 per cent.

The report said this could be a direct response to the financial regulators including the Australian Prudential and Regulation Authority cracking down on lending conditions making it tougher for customers to take out a loan.

ME consulting economist and report co-author Jeff Oughton said contributing large chunks of your income towards your mortgage or rent can quickly turn to disaster if your financial circumstances take a turn for the worse due to sickness or job loss.

“The worry for those people who are contributing higher levels of disposable income towards their house is that they lose their job,” he said.

“Equally what it means is that after you pay your mortgage and pay your living costs you have no savings and financial stress is rising.”

Mr Oughton said household stress levels typically rise once repayments pass 30 per cent.