Owning a home is a dream for many, but a dream that’s slipping away for a growing number of Canadians. Many believe they will be or already are priced out of the market, and some who technically could afford to buy a house are deciding to wait in order to avoid becoming house poor.
Being house poor essentially means you’ve overextended yourself on your mortgage and are having to make cuts elsewhere. You are managing to make your mortgage payments at the cost of being able to save for retirement, being able to afford necessities and/or luxuries, or are adjusting your lifestyle in a dramatic way.
The Cost of Owning a Home
Owning a home isn’t as easy as purchasing the home for X amount and being done with it. There are many costs associated with owning a home that need to be taken into consideration. Maintenance: When you own a home, all the home maintenance falls to you. It's important to have an emergency fund ready for the day something in your home inevitably breaks down.
Utilities: Your utilities aren’t factored into your mortgage payment and will need to be budgeted for accordingly. Be sure to calculate what it will cost monthly for electricity, gas, water, internet, garbage services, etc.
Property taxes: You will have to pay property taxes on your home. There are times when your property taxes will be included in your mortgage payment, but if they aren’t, look up the property taxes of your home (or prospective home) on your city’s website.
Mortgage interest: Interest rates can be volatile, and when it comes time to renew your mortgage you have to understand there is a chance you will pay more throughout the life of the mortgage.
Also consider you may face a financial emergency that isn’t related to your home. For example, if your car breaks down and you suddenly need to replace it. This will affect your other finances, including making your mortgage payment.
How to Avoid Being House Poor
No one intends to be house poor. Sometimes, your circumstances change and you find yourself struggling far more than you anticipated.
With that being said, there are things you can do in order to avoid becoming house poor.
Choose your home wisely: When you are shopping for a home and get pre-approved for a mortgage, you do not need to buy a home at the top end of your budget. Choose a home that will allow for some wiggle room, even if it means sacrificing some of the things you’re seeking in a home.
There is also a “32% rule” that is used when discussing purchasing a home. Canada Mortgage and Housing Corporation recommends that you spend no more than 32 per cent of your pre-tax income on housing expenses. Take this rule into account before purchasing a home.
Make a larger down payment on your home: Putting down a larger down payment on your home will reduce your mortgage payments, saving you thousands over the lifetime of the mortgage.
Erase debt: While it may not be possible for you to completely erase all your debt, it goes without saying that the less debt you have to pay off the better. It will be easier to maintain your mortgage when you are in control of your other debts.
Budget ahead: Budgeting is exceptionally important for any homeowner. Financial experts recommend setting aside 28 per cent of your monthly income and putting it into a high-interest savings account.
Keep an emergency fund: A “rainy day” fund can help alleviate any unforeseeable expenses that pop up in the future. Be sure that this fund is separate from your other savings; an emergency fund should be for just that, emergencies.
Beware of life inflation: Life inflation, or lifestyle creep, occurs when one’s spending increases as their income increases. The result is that someone could be making more money but saving just as much as they were before. Try to avoid frivolous purchases and instead put extra money into a savings account or towards your mortgage.
What to Do if You Become House Poor
If you believe that you have become house poor and are weighing your options, here are some things to consider.Reduce discretionary spending: The first thing you should look at is your discretionary spending. Cut down on eating out, going to the movies, spending money on hobbies, etc.
Get a second job: Getting another job may not always be the most practical option, but it’s the most surefire way to earn money. Even doing a couple of hours’ worth of work a week can help supplement some additional income.
Get a roommate: Renting out a room or floor of your home can help bring in additional income and offset the cost of your mortgage. Roommates also typically pay for part of the utilities.
Dip into your savings: Using your savings to cover mortgage payments is obviously not ideal and certainly not a long-term solution, but it can be done in order to prevent falling behind on payments.
Refinance or downsize: An absolute last resort is selling your home and downsizing to a home within your budget.
Being house poor is a challenging situation that no one wants to be in. To avoid it, plan carefully and be mindful of your spending once you own a home.
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