How Much Should You Really Spend on Housing Costs?

The question of how much to spend on housing has no single correct answer. What works for one household might be completely wrong for another, even at the same income level. Family size, location constraints, career stability, other debts, savings goals, and personal priorities all influence what is genuinely affordable for you. That said, some guidelines and frameworks can help you evaluate whether your housing costs are sustainable.

Beyond the Mortgage Payment

When people think about housing affordability, they typically focus on the mortgage payment. But that figure tells only part of the story. Rates, insurance, maintenance, and utilities are unavoidable costs of homeownership that can add thousands to your monthly expenses. A seemingly affordable mortgage payment becomes much less comfortable when you add another $500 or $800 per month for these additional costs.

For a realistic picture of your housing costs, add up everything: your mortgage payment (principal and interest), rates divided by twelve, house insurance divided by twelve, a monthly allowance for maintenance (typically 1% of property value annually divided by twelve as a starting point), and average monthly utilities. This total figure is what you are actually paying for housing, and it is the number that matters for budgeting.

If you own a unit title property, body corporate fees add another significant cost. These fees can be substantial, especially for properties with lifts, pools, or other amenities, and they can increase significantly over time. Always factor in actual or expected body corporate costs when calculating total housing expenses.

The Traditional Guidelines

Financial guidance has long suggested keeping housing costs below 30% of gross household income. This rule emerged decades ago and aimed to ensure households had sufficient income remaining for other necessities, savings, and discretionary spending. It remains a useful starting point, though it has limitations in today high-cost housing markets.

Some households, particularly in expensive cities, find they have no choice but to exceed 30% to own a home. This is manageable if other costs are low and income is stable, but it leaves less margin for error. When housing consumes 40% or more of income, the risk of financial stress increases significantly. Any income disruption or unexpected expense can quickly become a crisis.

Banks typically use debt-to-income ratios and serviceability tests that result in maximum borrowing amounts well above what many borrowers would be comfortable paying. Just because a bank will lend you $700,000 does not mean $700,000 of debt is right for your situation. Bank calculations assume you can cut discretionary spending to the bone if necessary; they do not consider whether you would want to live that way.

Stress Testing Your Budget

Interest rates change, and your budget needs to survive increases. If you can barely afford your current payments at 6%, what happens if rates rise to 8%? This is not a hypothetical question. Rates move in cycles, and assuming they will stay at current levels is risky.

A sensible approach is to calculate what your payments would be at two or three percentage points above your current rate. If those payments are uncomfortable but survivable with lifestyle adjustments, your borrowing level is probably reasonable. If higher rates would make payments genuinely unmanageable, you may be borrowing too much.

Income stability matters too. A household with two secure incomes can handle higher housing costs more safely than one relying on a single earner or variable income. If one income is commission-based, contract work, or otherwise uncertain, building more buffer into your housing costs makes sense.

What Gets Squeezed

When housing costs are too high, other parts of life suffer. Retirement savings are often the first casualty, particularly employer KiwiSaver contributions that get matched. Emergency fund building stops or never starts. Maintenance gets deferred, leading to larger problems later. Quality of life declines as there is nothing left for recreation, travel, or simply enjoying life.

Being house poor means owning a home but having nothing left for anything else. Some people accept this trade-off willingly for a period, especially when building equity early in ownership. But it is not sustainable long-term, and it is worth honestly assessing whether your housing costs leave room for a life you actually want to live.

Children add significantly to household expenses, and these costs are often underestimated by first-time parents. If you are planning a family, consider how childcare costs, reduced income during parental leave, and ongoing child-related expenses will affect your ability to manage housing costs. What seems manageable as a working couple may become a struggle with children.

Finding Your Personal Balance

Rather than blindly following percentage rules, work through what housing costs actually mean for your life. Start with your after-tax income and subtract fixed commitments: housing costs, insurance, minimum debt payments, and transport to work. What remains is what you have for everything else: food, healthcare, clothing, children, savings, entertainment, and unexpected expenses.

If the remaining amount seems inadequate for a reasonable life, your housing costs may be too high regardless of what percentage they represent. Conversely, if you have comfortable margin remaining, spending above traditional guidelines might be acceptable for your situation.

The goal is not to spend as little as possible on housing or to maximise what you borrow. It is to find a balance that gives you a home you are happy with while preserving financial flexibility and quality of life. That balance is personal and depends on what matters to you. Understanding the trade-offs involved helps you make a conscious choice rather than drifting into a situation that causes ongoing stress.