Should he use the 30% rule, the 28% rule or something else?
In This Article
- Current Rules of Thumb
- Where Do These Rules Come From?
- These Rules Aren’t Really for Renters of Buyers—They’re for Landlords and Lenders
- Finding a Better Rule of Thumb
- Partial Housing Costs → True Housing Costs
- Gross Income → Net Income
- Costs in a Vacuum → Costs in a Pie
- What If Ahmed Needs to Spend More on 1/3 of Net Income on Housing?
- Setting Our Own Anchors
- Related Articles
Ahmed teaches math at a junior high school in Alberta. He earns $105,000/year or $8,750/month.
He’s married with one child, and his wife, Fatima, has taken time off from her career to stay at home with their newborn baby. At least for the time being, they will be a single-income family.
As their family grows, Ahmed and Fatima feel they need a larger space than the studio apartment, but they’re unsure how much they should spend on housing.
Like most of us would, Ahmed turns to the internet and searches, "How much should I spend on housing?"
After hours of sifting through conflicting advice, Ahmed is more confused than ever. The rules for renting or buying seem contradictory, leaving him unsure of the next step.
Current Rules of Thumb
Ahmed’s search reveals two common rules of thumb, depending on whether he's renting or buying:
- Rent - The 30% Rule: You should spend no more than 30% of your gross income on rent.
- Buy - The 28/36 Rule: You should spend no more than 28% of your gross income on most of your housing costs (mortgage, insurance, and property taxes). Additionally, your total monthly debt payments, including the mortgage, should not exceed 36% of your gross income.
With a monthly gross income of $8,750/month, Ahmed does the math and sees he can afford:
- $2,650 per month for rent.
- $2,450 per month for combined housing costs if he buys.
But even with these numbers in hand, he still wonders if these rules are realistic for his family.
Where Do These Rules Come From?
The 30% rule and the 28/36 rule both originated from government policies and banking practices designed to reduce the risk of people defaulting on their rent or mortgages.
- 30% Rule (Rent): The U.S. government first introduced the 30% rule in the 1960s and 1970s to set rent affordability guidelines for public housing. Originally, it suggested 25% of income, but this was raised to 30% in the 1980s due to rising rent prices. Today, it’s widely used by landlords and housing agencies to determine whether you can “afford” rent.
- 28/36 Rule (Home Buying): This rule emerged from mortgage lending practices developed in the 1930s and 1940s. Banks needed a way to ensure borrowers could repay their loans. By limiting housing costs to 28% of income and total debt to 36%, lenders could minimize the risk of mortgage defaults.
These U.S.-based rules spread beyond America, shaping housing guidelines in Canada, the UK, and Australia. In Canada, the 30% rule for rent is commonly used by landlords and public housing programs, while the 28/36 rule has become standard for Canadian mortgage lenders.
These Rules Aren’t Really for Renters of Buyers—They’re for Landlords and Lenders
At first glance, these rules seem helpful. But Ahmed soon realizes they aren’t designed to help him figure out what he can comfortably afford—they’re designed to protect landlords and lenders. By focusing on gross income (before taxes), these rules create a buffer to ensure people can make housing payments, even if it means going into debt elsewhere.
- The True Goal: These rules aren’t about ensuring you live within your means. They’re about making sure you pay your rent or mortgage—no matter what. Even if that means relying on credit cards, taking out loans, or cutting back on other expenses, housing payments tend to be the last thing people sacrifice.
- Housing as the Last Expense Standing: Studies show that when financial trouble hits, housing is often the last expense people stop paying. They may cut back on groceries, miss other bill payments, or pile on credit card debt, but they’ll still make rent or mortgage payments to avoid losing their home. Lenders and landlords know this and count on it. These rules are designed to ensure you can make those payments, even if your overall financial health suffers.
The 30% and 28/36 rules focus on gross income and debt servicing, prioritizing housing payments over your overall financial health.
Even if you follow these rules perfectly, you might still find yourself stretched too thin. The system assumes you'll always prioritize housing payments, even if it means borrowing more.
That’s a problem, especially for Muslims who do their best to avoid dealing with riba-based consumer debt.
We need a new rule of thumb.
Finding a Better Rule of Thumb
Partial Housing Costs → True Housing Costs
First, Ahmed can't fall into the trap of focusing on a single housing line item. He needs to consider not just rent or mortgage payments. Instead, Ahmed must consider his true housing costs—everything it takes to live in a place.
That includes his rent or mortgage payments, but it also includes:
- Property taxes
- Insurance
- HOA or condo fees
- Utilities (with a buffer for fluctuating costs)
- Power & Heating: Electricity, gas, and heating
- Water & Waste: Water, sewer, and trash collection
- Communication & Media: Internet, TV, and security
When Ahmed is out shopping for housing, he’ll need to do a little work to ensure he’s comparing apples to apples.
Some rents include utilities like water and heating, while others may exclude everything, leaving Ahmed responsible for paying them separately. The same goes for homeownership: a mortgage might look reasonable, but once you factor in property taxes, insurance, and potentially higher utility costs, the real number becomes much higher.
True housing costs are the real out-of-pocket expenses Ahmed will face every month. This includes more than just the advertised price tag.
Gross Income → Net Income
Second, Ahmed needs to focus on his net income (take-home pay after deductions), not his gross income, to guide his decision. Gross income is an inflated, theoretical number lenders use to assess creditworthiness, not affordability.
Net income, however, is the money Ahmed actually controls each month. If he wants to avoid debt (and riba), he needs to base his decisions on the money he takes home,f not the inflated figure of his gross income.
Here’s how that breaks down for him:
Description | Amount ($) |
Gross Income | 8,750 |
Income Tax | - 1,597 |
Canada Pension Plan | - 505 |
Employment Insurance | - 145 |
Teacher Union Dues | - 123 |
Teacher Pension Fund | - 905 |
Net Income | 5,475 |
Costs in a Vacuum → Costs in a Pie
Ahmed needs to view his housing costs as a flexible proportion of his net income, not as an absolute number. It’s easy to label housing as “expensive” or “cheap” based on listings or hearsay, but those judgments mean little without considering how much money he actually has to work with.
For Ahmed, that’s $5,475 a month. So, is a housing cost of $2,650 “cheap” or “expensive”?
Who knows.
What matters is that it takes up over 48% of his take-home pay.
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The ceiling for the standard Target Flow Rate for all fixed spending is 60%. The more housing eats into that 60%, the less room there is for other essentials like transportation, groceries, and recurring expenses. If fixed spending spills over that limit, less is available for flex spending (eating out, gifts, retail), saving (both short-term and long-term), and sadaqah.
Thinking about costs in isolation isn’t useful. Instead, viewing housing as a proportion of net income that either gives or takes space from other expenses offers a more accurate picture.
A better rule of thumb: Aim to keep true housing costs at 1/3 (33%) of take-home pay.
Ahmed’s gross salary is $8,750 per month, but after deductions, his net income drops to $5,475.
If Ahmed follows the 1/3 rule, his true housing costs should be around $1,825 per month—including rent or mortgage, utilities, property taxes, and insurance.
The traditional 30% of gross income for just rent would have Ahmed spending more than $2,625/month. That’s at least 48% of his net income. The 28% homeownership would have him spending $2,450/month for housing costs excluding utilities. That’s at least 45% of his net income.
The standard rules push Ahmed into risky territory.
What If Ahmed Needs to Spend More on 1/3 of Net Income on Housing?
With rent and home prices on the rise, it’s becoming increasingly difficult for families like Ahmed’s to find affordable options.
By every measure, housing costs are outpacing income.
The following chart shows how the ratio of home prices to disposable income has risen sharply in both Canada and the U.S. It's worse in Canada.
Home prices are growing faster than wages, making housing less affordable year by year. Families are spending more of their income on housing, leaving less for other essentials.
The numbers on the left side of the chart (the y-axis) represent how many times a family's net income (they call it "disposable income" on this chart) is needed to buy an average home.
For example, if the number is 8, it means that the price of an average home is 8 times what the average family earns in a year after paying taxes.
So the higher the number the less affordable houses are.
Let’s get back to Ahmed.
If Ahmed needs to spend more than 1/3 on true housing costs, it’s important for him to recognize the trade-offs:
- He might need to revisit his Target Flow Rates and cut back on other spending categories to make the higher housing cost work.
- The standard target for a combined (long and short-term) savings rate is 20% of your net income for both long and short-term goals. Since Ahmed has a pension that covers much of his retirement savings, he could reduce his personal savings rate temporarily.
- If, rather than a 20% savings rate, he targeted a 13% savings rate, he may be able to afford housing at 40% of his take-home pay, or $2,190 for true housing costs.
Regardless, If Ahmed decides to spend more than 1/3 of his take-home pay on housing, he’ll need to make intentional adjustments elsewhere to make it work.
Setting Our Own Anchors
The marketplace often gives us rules like "30% of gross income" or the "28/36 rule," but these are designed to manage lender and landlord risk—not our personal financial health.
By setting our own anchor, like aiming to cap housing costs at 1/3 of take-home pay, we create a guideline that works for us, not just for the banks or landlords.
This approach gives us control over our finances and allows us to make thoughtful decisions that balance priorities—without overextending ourselves.
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Written by Farooq Maseehuddin
Farooq Maseehuddin (MuslimMoney Guy) is a financial educator and writer. He holds both a Bachelor of Education (BEd.) and a Master of Education (MEd.) from the University of Alberta. He's been a high school teacher and Muslim community organizer for two decades.