The 33% Rule In Home Ownership

In chapter 8 of my book we talk about the 33% rule when buying a house. To sum up this rule in one sentence: you should never ever commit to more than 33% of your family's after tax pay to minimum home repayments.

Very simply put, if the home you are looking at requires a $300,000 loan at 6.5% interest over 30 years. This means the minimum repayment per week is $437.29. Over the course of a full year, your minimum repayments would be $22,739.08.

Now how much would you and your partner have to earn to fit in with the 33% rule? You would have to earn after taxes, $68,906 or around $80,000 before taxes.

So the rule makes sure you don't stretch yourself financially. Only 33 cents in every after tax dollar you earn goes towards paying your minimum monthly repayments.

Of course in this situation we assume you have no other debts. If you had a car loan with $200 a week repayments. Then your total debt repayments would be $33,139. And you would need to earn $100,421 after tax to keep within the 33% rule.

Now here is a simple table to work out how much debt you are repaying a week. Fill in the blanks on a piece of paper to see how your family fits.

After tax income per week wage one $_______
After tax income per week wage two $________
Add wage one with wage two to equal $_________
1.A Multiply this number by 52 $______________

Minimum weekly repayments home loan $_________ (If you pay your home loan monthly, times your monthly amount by 12 and then divide by 52)

Minimum weekly repayments credit card $________

Minimum weekly repayments car loan $_________

Minimum weekly repayments personal loan $_________

Minimum weekly repayments interest free loan $_________

Minimum weekly repayments any other loan $_________

Add all the minimum weekly repayments $_________

2.B Multiply this number by 52 $______________

3.C Take figure 1.a and divide by 100 $_________

Now take the figure 2.b and divide by 3.c______%

This is an easy way to work out how much you spend percentage wise on debt every year. Is it above the 33% mark? If so, how much?

If you are on or below, the 33% mark well done, you are doing really well. If it is only 0 to 6 percent, you are still doing pretty well. However if you find you are paying over 40% of each after tax dollar towards debt, this is a concern.

Of course, any percentage you are paying could increase dramatically if interest rates go up. It does not take a maths' teacher to work out that if any of the minimum payments increase, your overall percentage earmarked for debt has to increase.

So what can you do about it? Well for one you can pay more than the minimum payments. This will reduce your overall debt, thus decreasing your overall percentage. Over time, this will also decrease your weekly minimum payments on credit cards.

Do not take on any additional debt. Why add to the problem? New car, credit card, loan for a holiday; put all these on the backburner.

Downgrade your biggest culprit. Yes, I am talking about the home loan. Can you move to a smaller home or a cheaper suburb? Seems drastic I know, but it will make your finances a lot safer.

Do anything you can to start getting your minimum payments down to the 33% level. No more than 33 cents in every after tax dollar. Anything beyond this is heading for troubled waters.

We would love some examples of people who have tried this. What percentage did you get? Are you happy where you are sitting? Send us an email This e-mail address is being protected from spambots. You need JavaScript enabled to view it