While I like heuristics as much as (or more than) others, I have to respectfully push back against the one you propose here. I believe it fails what I’d dub “the Einstein admonition,” that every problem should be simplified as far as possible, but no further.

Say my gross annual income is $100,000. According to this proposed rule, my mortgage should be no more than $250,000. However, if my mortgage interest is 4% vs. 6%, my monthly payments would be $1193.54 vs. $1498.88 (more than 25% higher). Obviously, when interest rates are lower, I can afford a larger mortgage than when they’re higher.

There are many other factors that complicate the picture, but make it more relevant, including:

  • How high is my tax rate?
  • How much do I pay in interest on other debt?
  • How high is rent in the area I choose to live in compared to the cost of carrying the mortgage I need to take to be able to buy instead?

The heuristic of comparing the size of your mortgage to your gross income ignores these and others, providing an over-simplified, and thus distorted view.

If mortgage rates are really high, my taxes are high, I carry a lot of other debt, and rents in my area are low, I may have a hard time even with a mortgage that’s only 200% of my gross income.

On the other hand, if rates are really low (like they are now), I carry little or no other debt, and rents are relatively high, it makes sense to take on a mortgage higher than 250% (or even 500%) of my gross annual income if that’s what’s needed.

Consultant | physicist | sys eng | writer |financial strategist (opherganel.com) | avid reader | amateur photographer and artist ➜ medium.com/financial-strategy