Housing Should Comprise Less Than 30% of Your Gross or Net Income?

At some point in my adult life, I learned this rule of thumb:

The monthly cost of housing (that is, rent or mortgage) should comprise less than 30% of your income.

It’s a kind of personal finance benchmark: if you’re spending too much on housing, you’re probably not living an economically-sustainable lifestyle. For example, I recently read that, on average, Montrealers “spent 18.6 per cent of its income on housing and shelter costs in 2006”. On an unrelated note, the median cost of housing in the Montreal area seems shockingly low at $683 a month.

However, I’ve never been clear as to whether they meant 30% of your gross or your net income. I decided to finally figure it out, and write up the answer.

First off, various sources indicate that the correct metric is 30% of your ‘household’ (or sometimes ‘family’) income. So what’s ‘household income’? According to Wikipedia:

Household income is a measure of current private income commonly used by the United States government and private institutions. To measure the income of a household, the pre-tax money receipts of all residents over the age of 15 over a single year are combined. Most of these receipts are in the form of wages and salaries (before withholding and other taxes), but many other forms of income, such as unemployment insurance, disability, child support, etc., are included as well.

So the key phrase there is ‘pre-tax money’. Apparently, then, the rule of thumb applies to your gross income. Does that jibe with what you thought?


  1. I’ve always been lead to believe it’s pre-tax money, and is also supposed to include necessary utilities (heat, electricity, water) and property taxes.

  2. I always thought it was net and I was all ‘Wow, I am bollocksing this up right good. Thank you, overpriced Vancouver housing market for not giving me a bloody alternative’

    But if it’s gross, I’m actually sliding in just under the wire. Woot!

  3. Jen: That was one thing that I’ve been unable to figure out: are utilities, strata fees, property taxes and so forth meant to be included? I suspect, as you say, they are, but I was unable to find anything definitive.

  4. I’ve heard 30% too, but assumed it was net. I have no idea why.

    My rent is just over 50% of my income, but it includes all of my utilities except for phone.

  5. My experience in the UK was that if you were looking for a Mortgage the banks would give you 3 times your Gross, which is maybe where this comes from.

    Put another way, if you want to buy a $600K condo in Vancouver (i.e. a cheap one) you would need to earn $200K. Average House Hold Income is about $60K in Vancouver which leaves a bit of a gap.

    Of course in the UK the 3x multiple was for the highest earner in the household, as an alternative you could have 2.5 times Joint.

    So to extrapolate, to get that 600K you need a Household Income of $240K!

    It’s a fun game this, actually my better half suggests it should be 30% of your Net Pay or 3x your Gross for the Mortgage!

  6. I can see none of you got a mortgage in the US before they tightened up the lending practices.

    My mortgage (PIT) was about 90% of the take-home-pay on the stubs I showed to the lender, 100% if you count utilities. Given all the tax, retirement and other savings deducted, it was about 40% of gross (45% with utilities). The house was 7x our single income. We did have savings and put 20% down, so I guess the lender figures we covered their potential losses.

  7. I think a percentage relative to net income would make more sense as a rule of thumb given the different tax rates from place to place.

  8. Please note that in the U.S. the mortgage interest is generally tax-deductible. I’ve heard in Canada it’s not. That would make a difference.

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