How to calculate how much rent can I afford to pay each month
Renting a home is the best option for people who aren't ready to commit to owning a home and taking on a mortgage, especially in todays market where mortgage products are few and far between and deposits asked for are high (maybe as much as 20%).
It makes perfect sense to rent for a year or two if you're just moving into an area. You can take that time to discover the best places to live. If your job is temporary, or you get transferred often, renting often makes the most sense.
How to calculate how much rent you can afford
To work out how much rent you can afford you need to do some basic maths. You need to think of everything you spend your money on, including that money you put away for a rainy day, savings for holidays to name a couple. Then work out your take home pay (earnings after tax). Whatever you are left with is available to you.
Firstly, calculate your total monthly income before taxes. This includes your annual salary and income from other sources (alimony, child support, tax credits, other benefits, dividends). Total your annual income and divide the amount by 12. The result is your Total Monthly Income Before Taxes.
Now calculate your total monthly outgoings, food, clothing, petrol, magazines, holidays, loans and dont forget Council tax and utility bills like electric, gas and water. It is worth comparing costs of utility bills with one of the online camparison sites and see if you can get a better deal. Make sure to include everything you owe, such as student loans, car payments, child support, the minimum payment on credit cards, and any other debts you pay on monthly. Total them all. This is your monthly long-term debt.
To work out the maximum monthly rental payment you can afford including renter's insurance. Subtract your monthly long-term debt from your gross monthly income, the rest it want you could afford to spend on rent.
However, there are a few rules you should consider.
It’s a good rule of thumb to spend only 25%-30% of your total income on rent. SO if you are earning £20,000 per year you may wish to spend between £5,000 and £6,000 on rent (£416 to £500per month).
Also if you are going to rent using a letting agent there is a usual requirement that your gross income covers the annual rent by a factor of 2.5 times your annual salary before taxes. So if your rent is £6000 per year (£500per month) your gross salary needs to be over £15,000 (2.5x) for the agent to consider you renting that property – as a general rule.