Why use this calculator
Most affordability calculators answer the wrong question. They divide income by a rule of thumb and hand back a price, ignoring the two things that actually stop purchases: existing debt and cash at settlement. A lender does not look at your salary in isolation. It measures the proposed housing payment against gross monthly income, then measures total debt service against the same income, and approves the lower of the two.
Separately, the closing agent needs the deposit plus two to five per cent of the price in cash on the day, and in Australia or the UK transfer duty pushes that cash requirement higher again. This calculator runs all three tests, tells you which one binds, and shows what to change. Buyers who know their binding constraint make better offers and stop wasting weekends on houses no lender will fund.
How to use it
- Enter the gross pre-tax income of everyone who will be named on the loan, taken from payslips or your last tax return rather than what lands in the bank.
- Add up the minimum monthly payments on car loans, student loans, personal loans and every credit card from your latest statements and put the total in monthly debt repayments.
- Set the deposit as a percentage of the purchase price, remembering that anything under twenty per cent triggers mortgage insurance.
- Use the interest rate you have actually been quoted, or this week's average survey rate if you have not applied.
- The property tax rate comes from your county assessor and the insurance premium from a quote divided by twelve.
- Enter HOA or strata fees from the listing, set closing costs to local practice, then enter the cash you can genuinely commit after keeping an emergency fund.
What each result means
- Maximum home price
- The highest purchase price that passes both the lender ratio test and your cash-at-settlement test. The note says which one binds.
- Cash needed at settlement
- Deposit plus closing costs or stamp duty, due in cleared funds before handover. This is the figure that derails most first purchases.
- Cash left after settlement
- The savings you would still have once the deposit and closing costs or stamp duty are paid at the maximum price, which is your buffer for moving costs and surprises.
- Total monthly housing cost
- Principal, interest, property tax, insurance, mortgage insurance and HOA fees combined. What actually leaves your account each month.
- Maximum housing payment allowed
- The ceiling your lending standard puts on housing costs, after subtracting existing debt repayments from the back-end allowance.
- Loan amount
- What you would borrow at this price and deposit. Compare it with the lender's maximum loan size and any conforming loan limit.
- Deposit
- The cash share of the purchase price at your chosen deposit percentage, excluding closing costs and transfer duty.
- Closing costs or stamp duty
- Transfer duty, title, origination, appraisal and legal costs at the percentage you entered. Rarely financeable and almost always underestimated.
- Monthly principal and interest
- The loan repayment alone, before tax, insurance and fees. This is the only part that pays down the debt.
- Monthly property tax
- One twelfth of the annual property tax bill at this price, usually collected through an escrow account with the repayment.
- Monthly mortgage insurance
- Insurance protecting the lender, charged while your deposit is below twenty per cent. It buys you nothing and can be cancelled as equity grows.
- Back-end debt-to-income ratio
- Total monthly debt including housing as a share of gross monthly income. This is the number underwriters quote back at you.
The formula
The income limit solves
H = A ÷ [(1 − d)(f + m) + t ÷ 12]
- H
- the home price
- A
- the monthly amount left for loan and tax after insurance and fees
- d
- the deposit fraction
- t
- the annual property tax rate
- m
- the monthly mortgage insurance rate on the loan (0.6% a year while d is under 0.20)
- f
- the amortisation factor r(1+r)ⁿ ÷ [(1+r)ⁿ − 1] with r the monthly interest rate and n the number of monthly payments
A itself is the lower of income × 28% and income × 36% minus existing debts.
The cash limit
H = cash ÷ (d + c)
The answer is the lower of the two limits.
How this number is used in practice
The 28/36 rule is not folklore. Underwriters compute a front-end ratio, which is the proposed housing payment over gross monthly income, and a back-end ratio, which adds every other debt payment. The conservative pair is 28 and 36, agency loans commonly run to 31 and 43, and automated underwriting will approve stretched files above that when the deposit is large or reserves are deep.
The practical consequence is that debt is more expensive than it looks: a $450 car payment does not just cost $450, it removes roughly $60,000 to $80,000 of borrowing power at current rates. Clearing a small loan before applying frequently buys more house than adding the same amount to the deposit.
Cash at settlement is the constraint nobody models. In the United States closing costs run two to five per cent of price and are paid on top of the deposit. In Australia transfer duty alone is typically four to five per cent for a buyer with no concession, so a $700,000 purchase can need $35,000 of duty before legal fees, inspections and lender charges.
In the UK stamp duty land tax works the same way. That is why this calculator applies a cash test as well as an income test, and why the answer so often comes back capped by cash rather than by serviceability.
Remember too that lenders assess the payment at a buffer rate, not the offered rate. Australian regulators require authorised lenders to test serviceability at roughly three percentage points above the loan rate, and UK affordability rules apply a similar stress test. If you want the number a bank will actually approve rather than the number your budget tolerates, run this calculator a second time with the rate raised by three points and treat the lower result as your real ceiling.
Worked examples
$110,000 income, $500 of monthly debts, 20% deposit, 6.5% over 30 years, $120,000 cash
Income binds first at $402,910, needing $92,669 of cash and $2,566.67 a month all in.
The same household with only $60,000 saved instead of $120,000
Cash becomes the binding limit and the ceiling falls to $260,870. Saving more is the only fix.
The same household carrying $1,500 a month of debt repayments
The 36% back-end ratio takes over and the ceiling drops to $274,559 on identical income.
$85,000 income, no debts, 10% deposit at 7%, $60,000 cash
Income limits the price to $247,925, with $111.57 a month of mortgage insurance added on top.
$160,000 income, $900 of debts, 20% down at 6.5%, $250,000 cash on agency ratios
Approved to $665,192 on the 31/43 standard, at $4,133.33 a month and a 37.75% back-end ratio.
When people use it
- Setting a realistic search range before you start viewing properties
- Finding out whether debt or cash is the thing actually holding you back
- Testing what clearing a car loan does to your borrowing power
- Pricing the deposit-plus-duty cash you need saved by settlement day
- Stress-testing a purchase three points above the offered rate, the way regulators require lenders to
Tips
- Run it twice, once at your quoted rate and once three points higher. The higher figure is closer to what an underwriter will approve.
- Clearing a small high-payment debt usually adds more borrowing power than adding the same cash to your deposit.
- Closing costs and stamp duty are cash, not loan. Budget them separately or you will be short in the week of settlement.
- Keep an emergency fund out of the cash figure. Lenders like to see reserves after settlement and life does not stop for a purchase.
- Qualifying for a number is not a recommendation to spend it. Maintenance runs about one per cent of property value a year and sits in no ratio.
- If mortgage insurance is being charged, ask your lender which loan-to-value ratio cancels it and when it drops off automatically.
- Use the actual tax bill from the listing rather than a county average. Assessments reset on sale in many states.
What it assumes, and where it stops being accurate
- The 28/36 ratios and their agency variants are US conventions. Australian lenders use a net income surplus test with a serviceability buffer and UK lenders use an affordability assessment, so the result is indicative outside the US.
- Mortgage insurance is applied at a flat 0.6% of the loan a year whenever the deposit is under 20%. Real premiums range from about 0.3% to 1.5% depending on credit score and loan-to-value ratio.
- The interest rate is treated as fixed for the whole term. It does not model an adjustable rate resetting, an offset account or an interest-only period.
- Property tax is applied to the full purchase price with no homestead exemption, assessment ratio or annual increase cap. Use the property tax calculator for that detail.
- Maintenance, utilities, repairs and moving costs are excluded, as are HOA special assessments and land tax on investment property.
- Income is treated as fully assessable. Lenders discount overtime, bonus, commission and rental income, often by twenty per cent or more.
Terms used on this page
- Front-end ratio
- Proposed housing payment divided by gross monthly income, expressed as a percentage.
- Back-end ratio
- All monthly debt payments, including housing, divided by gross monthly income.
- PITI
- Principal, interest, taxes and insurance. The four parts of a standard escrowed mortgage payment.
- Closing costs
- Cash fees payable at settlement, including title, origination, appraisal, legal work and transfer duty.
- Serviceability buffer
- An interest rate margin, around three percentage points in Australia, that lenders must add when testing whether a borrower can repay.
Questions people ask
- What exactly is the 28/36 rule?
- It is a pair of debt-to-income limits. The front-end ratio says your total housing payment, principal, interest, tax and insurance, should not exceed 28% of gross monthly income. The back-end ratio says all debt payments together should not exceed 36%. Lenders approve the lower of the two, so existing debts directly reduce how much house you can buy.
- Why does the answer sometimes ignore my income entirely?
- Because cash became the binding limit. If you can service a $500,000 loan but only have enough saved for the deposit and closing costs on a $370,000 purchase, the smaller number is the one that matters. The note under the maximum price tells you which test is binding, so you know whether to clear debt or keep saving.
- Does this include mortgage insurance and closing costs?
- Yes to both. Mortgage insurance is added to the monthly payment at 0.6% of the loan a year whenever your deposit is under 20%, which reduces the price you can support. Closing costs or stamp duty are treated as cash payable at settlement on top of the deposit, because in almost every market they cannot be added to the loan.
- Should I borrow the maximum the calculator shows?
- Rarely. The ratios test whether you can make the payment, not whether you can also save, run a car, raise children or absorb a rate rise. Many buyers deliberately target eighty per cent of their approved figure, which leaves room for maintenance at roughly one per cent of value a year and for rates to move against them.
- How do Australian and UK lenders assess this differently?
- Australian lenders run a net surplus test: assessable income less tax, less living expenses measured against a benchmark, less all debt commitments, with the new loan assessed at roughly three percentage points above its actual rate. UK lenders apply a comparable stress test plus an income multiple cap. Both are stricter in practice than a flat 36% back-end ratio.
- Why did my pre-approval amount change when rates moved?
- Because the payment is calculated from the rate while the ratio limits stay fixed against your income. Each half a percentage point moves buying power by roughly five per cent, so a one-point rate rise can remove ten per cent of your maximum price without your finances changing at all. The rate table on this page shows the effect.
Use this with
Home Affordability Calculator answers one part of the question. These pick up where it stops: Mortgage Calculator, Stamp Duty Calculator, First Home Buyer Calculator, Rent vs. Buy Calculator and Property Tax Calculator.
Where these figures come from
Figures and rules on this page follow United States federal rules.
- Consumer Financial Protection Bureau: Owning a Home. US mortgage process, closing costs and lender qualification
- Freddie Mac: Primary Mortgage Market Survey. Weekly US average mortgage rates
- US Department of Housing and Urban Development. Housing programs, affordability standards and rental data
- ASIC Moneysmart. Independent Australian guidance on borrowing, budgeting and home ownership
Home Affordability Calculator produces an estimate for general information. It is not financial, tax, medical, legal or engineering advice. read the full disclaimer. Spotted a wrong number? Report it and it gets fixed. The form picks up this calculator and the inputs you used.