One-Third Housing-Cost Rule
Keep mortgage and maintenance below one-third of income
- Difficulty
- Easy
- Time to result
- ~days to results
- Steps
- 4
- Confidence
- 98%
The One-Third Housing-Cost Rule evaluates a home by its ongoing burden, not its headline price. Add the mortgage payment and the cost of maintaining the property, then compare that total with income. If housing exceeds one-third, O'Leary says the buyer has purchased too much house. He recommends starting smaller or in a less preferred neighborhood rather than allowing housing to absorb most income. The calculation should also be stress-tested against a higher mortgage rate, because a payment that looks manageable with cheap financing can become destructive at refinancing. The rule preserves room for other investments and distinguishes property value from actual owned equity: a highly leveraged house is both an asset and a large debt obligation.
Origin
O'Leary says he learned this housing rule from his mother and applied it to his own first purchase.
Core principles
- 01Affordability includes maintenance as well as the mortgage
- 02A smaller first home is safer than an oversized obligation
- 03Higher refinancing costs can expose overbuying
- 04Home equity is the asset, not the full property value
How to run it
- 1
Calculate full housing cost
Add the expected mortgage payment to recurring maintenance costs. Include realistic upkeep rather than the loan payment alone.
Watch out Ignoring maintenance understates the burden.
- 2
Apply the one-third test
Divide full housing cost by income. If the result exceeds one-third, reduce the purchase budget or reconsider the property.
Watch out This is O'Leary's general rule, not individualized lending advice.
- 3
Stress-test refinancing
Repeat the calculation using a materially higher interest rate. Check whether the property remains manageable if cheap financing disappears.
- 4
Choose the smaller commitment
If the preferred home fails the test, start with less space or a different neighborhood. Preserve cash flow for other needs and diversified investments.
In the wild
O'Leary describes buyers who took large mortgages when rates were near 3.2 percent, then faced rates above 7 percent. He says some resulting housing costs reached 60 to 80 percent of income.
→ The example shows why affordability should survive more than the initial rate environment.
Common mistakes
Counting only the mortgage
Maintenance is part of the ongoing burden and belongs in the affordability test.
Assuming property value equals wealth
The owned asset is the equity after debt, not the property's entire market price.
Is it for you?
Best for
It is best for prospective owner-occupiers comparing homes and mortgage commitments.
Not ideal for
It is not ideal as a universal underwriting standard because taxes, income stability, and local housing costs differ.
From the transcript
“Never let the mortgage and the cost of maintaining the house be more than 1/3 of your income.”
“If it's more than 1/3, you bought too much house.”
From the episode
Kevin O'Leary: This Daily Habit Is Keeping You Poor. Here's What You Should Do Every Time You Get Paid!