Once you start considering a home purchase, the first thing you often hear is "how many times your annual income can you borrow?" But an income multiple is only a rough guideline, and the amount that's actually comfortable for you changes with the interest rate, repayment period, and family composition. When setting a budget, it's more practical to think in terms of the "repayment ratio" (hensai hiritsu, also called the repayment burden ratio) — the proportion of your annual repayment amount to your annual income. Here we walk through how to think about the repayment ratio, and how to build a budget that also accounts for your down payment and incidental costs.
- Rather than an income multiple, it's more practical to set your budget based on the repayment ratio — the proportion of your annual repayment amount to your gross annual income.
- A comfortable repayment ratio guideline is often said to be within 20–25% of gross annual income.
- Note that the repayment ratio cap used in a lender's screening is a different standard from what's comfortable for your household budget.
- Since gross annual income differs from take-home pay, also check your living costs on a take-home basis.
- Build your budget comprehensively, including your down payment, incidental costs, and an emergency living fund after purchase.
The bottom line: why repayment ratio beats income multiple
A guideline like "5 to 7 times your annual income" is easy to grasp, but the amount that's actually comfortable varies greatly with the interest rate, repayment period, and any other borrowing you have. Even at the same income multiple, a higher interest rate increases your monthly payment, and a shorter repayment period likewise increases the burden. So when considering your budget, it's practical to use the income multiple as a rough starting reference, while checking your repayment ratio — how much of your income the actual repayment amount represents.
What is the repayment ratio (repayment burden ratio)?
The repayment ratio is the proportion of your annual mortgage repayment amount to your gross annual income. Lenders use this same metric in screening, but the standard used in screening is fundamentally about "whether they can lend to you," which is a different question from "whether you personally can repay comfortably." It's important to treat the amount that clears screening and the amount that's comfortable for your life as two separate things.
A comfortable repayment-ratio guideline
Generally, keeping the annual repayment amount within 20–25% of gross annual income is considered a comfortable guideline. Households with heavy non-housing expenses — education costs, car upkeep, and the like — should be even more cautious even within this range. Conversely, even households with fewer expenses should think carefully before setting their repayment near the upper end of the range, given the possibility of future changes in income or rising interest rates.
Watch the difference between gross income and take-home pay
The income used to calculate the repayment ratio is generally your gross annual income, before taxes and social insurance premiums are deducted. The amount that actually reaches your hands is less than that, so even if your repayment ratio falls within the guideline, it's important to check the balance against your monthly living costs on a take-home basis. If you're factoring in bonus repayments, also keep in mind the risk that your bonus may fluctuate.
Factor in your down payment, incidental costs, and an emergency fund too
Your budget isn't determined by the mortgage amount alone. How much of a down payment you put in, and how you cover incidental costs such as registration fees and brokerage commission, both affect how comfortable your plan is. We cover how to think about your down payment in How Much Should You Put Down? Balancing Your Own Funds — please have a look. It's also reassuring to keep a certain emergency living fund on hand after purchase, so you can respond to unexpected expenses.
Choosing an interest rate type and preparing for future change
Even with the same loan amount, the outlook for your future repayment differs by interest rate type. A variable rate can keep your initial payment lower, but future rate increases may push your repayment ratio higher than expected. A fixed rate offers the reassurance of an unchanging repayment amount, but its initial rate is generally set higher than a variable rate. We go into detail on how to choose an interest rate type in Choosing a Mortgage Interest Rate Type (Variable, Fixed, or Mixed).
FAQ
What multiple of my income is the guideline for how much I can borrow?
A guideline of 5 to 7 times annual income is often cited, but this is just a rough reference figure that changes with interest rates and the repayment period. In practice, checking your repayment ratio against your gross annual income better reflects reality.
How high can my repayment ratio safely go?
Keeping the annual repayment amount within 20–25% of your gross annual income is generally considered a comfortable guideline. It's important to check this against what your household can comfortably afford, which is a separate matter from the upper limit used in a lender's screening.
Is it fine to factor in bonus repayments?
Combining bonus repayments can lower your monthly payment, but bonuses can fluctuate depending on business performance and other factors. It's reassuring to structure your repayment ratio so it remains manageable even without a bonus.
Summary
Rather than setting your home-buying budget on income multiple alone, it's important to comprehensively consider your repayment ratio against gross annual income, your take-home pay, your down payment and incidental costs, and future interest rate changes. Keep a comfortable repayment-ratio guideline in mind and build a financial plan with room to spare.