By Paul Feeney, Founder and Chief Executive Officer, Otivo
A household on $140,000 with a $600,000 mortgage sits at 30.8% of gross income — barely over the line that's supposed to mark mortgage stress. Measured against the money that actually arrives in their account, they're at 41.4%. Both numbers describe the same family, the same loan and the same month. Only one of them is spent on anything. The 30% rule has been repeated for so long that almost nobody checks which income it refers to, and the answer explains why so many households feel stretched while the ratio says they're fine.
Quick answer
The 30% mortgage stress rule measures repayments against gross income, before tax and the Medicare levy are deducted. Australians pay mortgages from net income. As at August 2026, a household earning $140,000 with a $600,000 loan at 6% is at 30.8% of gross income but 41.4% of net — a difference of more than ten percentage points on identical figures.
Where does the 30% rule come from?
It began life as a housing affordability measure, and as a broad statistical indicator across a whole population it does a reasonable job. Applied to one household deciding whether it can afford a loan, it has a problem: gross income includes money that was never available.
Take that $140,000 salary in 2026-27. Income tax comes to $32,870 and the Medicare levy adds $2,800, leaving $104,330 a year, or $8,694 a month. Gross monthly income is $11,667. The gap between those two figures — nearly $3,000 a month — is where the entire distortion lives.
What the same loan looks like at four rates
A $600,000 loan over 30 years, owner-occupier, principal and interest, no offset, fees ignored. Household net income of $8,694 a month.
| Interest rate | Monthly repayment | % of gross income | % of net income | Net income left |
|---|---|---|---|---|
| 6.0% | $3,597 | 30.8% | 41.4% | $5,097 |
| 6.5% | $3,792 | 32.5% | 43.6% | $4,902 |
| 7.0% | $3,992 | 34.2% | 45.9% | $4,702 |
| 7.5% | $4,195 | 36.0% | 48.3% | $4,499 |
Read the last column rather than the ratios, because it's the one that has to cover everything else. At 6%, this household has $5,097 a month for groceries, utilities, transport, insurance, childcare and anything unexpected. At 7.5%, it's $4,499 — a $598 monthly reduction that no pay rise offset.
Notice too how the gross column understates the movement. It travels 5.2 percentage points across that range while the net column travels 6.9. The rule of thumb is least accurate at exactly the point where accuracy matters most.
The net income test
Three steps, and it takes about five minutes.
- Find your actual net income. Not your salary — the amount that lands in your account each month, after tax, the Medicare levy and any salary sacrifice arrangement. If super is included in your package rather than paid on top, the salary component is lower than the headline figure, and this is where that shows up.
- Divide your repayment by that number. This is your real ratio. Expect it to be meaningfully higher than the gross figure you may have been quoted.
- Look at what's left, not just the percentage. Subtract every fixed cost you can name from the remainder. Whatever survives is the buffer that absorbs a rate rise, a broken hot water system or a month of reduced hours.
Otivo's debt advice module runs your own loan, income and expenses through this and shows what changes when the rate moves. ASIC's MoneySmart mortgage calculator is a free option for the repayment figures alone.
What rate did your lender assume you could handle?
More than the one you're paying. APRA requires lenders to assess whether a borrower could still meet repayments at their actual rate plus three percentage points — the serviceability buffer, which APRA confirmed would remain at three percentage points in May 2026, where it has sat since late 2021.
So a borrower on 6.2% was assessed at around 9.2%. On this loan, that's a monthly repayment near $4,914, or roughly 57% of net income. Lenders assess that against a full expense picture rather than a simple ratio, but the point stands: the loan was approved on the assumption that this household could absorb considerably more than it's currently paying. Whether it feels that way is a different question, and the answer usually depends on what's in the last column of the table above.
The Reserve Bank held the cash rate at 4.35% at its August 2026 meeting, after three increases in the first half of the year. Households that haven't looked at their repayment since those increases landed are carrying the full effect of all three.
Frequently asked questions
What ratio is considered safe?
There isn't a threshold that holds across households, which is part of the problem with the rule. A family with childcare costs and one car has a different tolerance to a couple with neither, on identical incomes. The amount left after fixed costs is a better guide than any percentage.
Does the 30% rule apply to rent as well?
The same measure is commonly applied to rent, and it carries the same gross-versus-net distortion. Rental stress is usually defined as lower-income households paying more than 30% of gross income on rent.
Would extending the loan term help?
It lowers the monthly repayment, which helps cash flow immediately, and it increases the total interest paid over the life of the loan. Switching to interest-only repayments does something similar, with the added feature that repayments step up when the interest-only period ends and principal starts being repaid.
What if the numbers already don't work?
Free financial counselling is available through the National Debt Helpline on 1800 007 007. It's independent of any lender and costs nothing. Lenders also have hardship processes, and contacting them earlier generally leaves more options available than contacting them after a missed repayment.
The ratio was never the point. What matters is what's left, and that's a number you can work out in five minutes with a payslip and a loan statement. Otivo Pty Ltd holds AFSL and Australian Credit Licence No. 485665.
Sources
- Australian Prudential Regulation Authority, APRA maintains current macroprudential policy settings, 28 May 2026.
- Reserve Bank of Australia, Monetary Policy Decision, 11 August 2026.
- Reserve Bank of Australia, Lenders' Interest Rates, May 2026.
- Australian Taxation Office, Individual income tax rates 2026-27.
- ASIC MoneySmart, Mortgage calculator.
- Otivo modelling, August 2026.
Disclaimer
The information in this communication is current as at August 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.