Being ‘house poor’ essentially means your housing expenses take up a huge part of your budget. After paying all your housing costs, you’re left with very little for anything else. In this case, you may struggle to stay financially afloat.
Let’s take a closer look at what it means to be house poor and what you can do to prevent or fix it.
Key Points
- If you’re house poor, you’re likely struggling to afford your housing costs and have little left over to pay other bills or leisurely expenses.
- You can avoid becoming house poor by purchasing a cheaper home, making a larger down payment, or spending less than your pre-approval mortgage amount.
- If you’re already house poor, cut back on spending, boost your income with a side gig, or consider downsizing to a more affordable home.
How To Tell If You’re House Poor
As we discussed above, being house poor basically means that you have trouble affording your home. This means something different for everyone, but if any or all of the following situations describe what you’re currently dealing with, then it may be time to reevaluate your current living situation:
- You carry large balances on several credit cards
- You rely heavily on credit cards to pay for necessities like groceries
- You’ve given up family vacations or other travel opportunities because you need to make a mortgage payment
- You have to scrimp and save for months leading up to paying your property and school taxes
- You’re constantly worried about the cost of the home you’re living in
Again, everyone’s financial circumstances are different, so it’s important that you evaluate yours based solely on what you’re currently dealing with and what you want for your future.
Common Causes Of Becoming House Poor
There are several reasons why you may have found yourself house poor:
Buying A Home That’s Too Expensive
Perhaps the most common reason why Canadians become house poor is simply because the home they buy is too expensive for their financial situation. Maybe you underestimated what your housing costs
Spending The Full Pre-Approval Amount
This goes hand in hand with purchasing a house that’s too expensive, but it’s still an important point to make. When you get pre-approved for a mortgage, your lender will tell you how much money you may be able to borrow. However, you don’t have to apply for the maximum amount your lender may approve you for.
In fact, it’s wise to spend much less than the maximum amount you may qualify for as lenders do take into consideration certain saving goals or leisure expenses you may have Leaving a little wiggle room is a better idea, as it will ensure a bigger financial cushion in case other bills creep up that you may not have budgeted for.
Job Loss Or Reduction In Income
No one wants to think about losing their job, but it happens. Losing your job or taking a pay cut can have a significant financial effect on you and your ability to continue paying your bills, including your mortgage.
No Emergency Funds Or Savings
Owning a house is expensive, no matter how you look at it. Aside from your mortgage payments, there are countless other expenses that you might not have taken into consideration, such as last minute repairs or replacements. Plus, there are plenty of other unexpected situations that might occur that may require extra cash.
Having an emergency fund will help you deal with any unexpected expenses.
Too Much Consumer Debt
If much of your available income is going towards paying things like credit card debt, student loans, car loans, personal loans, and payday loans, the chances of you becoming house poor are much higher.
To fix this issue, you’ll need to consider paying off your debts and keeping your expenses low to have more room in your income for house expenses.
How To Avoid Becoming House Poor
The logical answer to this question is obviously to only purchase a house you can afford. But we understand that’s easier said than done and that often you may not even know how much house you can afford.
Here are a few things you can do to avoid becoming house poor:
Spend Less Than One-Third Of Your Income On Housing
A general rule of thumb is to keep your housing costs to no more than 32% – 39% of your income on housing expenses, according to the Canada Mortgage and Housing Corporation (CMHC). So, if your monthly pre-tax income is $5,000, for instance, then you should keep your monthly housing costs to less than $1,600 to $1,950.
Make A Bigger Down Payment
To help lower your mortgage payment is to make a larger down payment upfront, if possible. Not only will you have more equity in your home right away, but your mortgage payments will be smaller.
Spend Less Than Your Pre-Approval Limit
As mentioned, you can find yourself house poor if you max out on your pre-approval loan limit. Try to avoid this temptation. Leave a little financial room in your budget by opting for a loan that’s much lower than what you’re pre-approved for, which can pay off in the long run, especially if unexpected expenses pop up.
Consider A Fixed-Rate Mortgage
If your budget can’t handle fluctuations, then you may be better off opting for a fixed-rate mortgage over a variable-rate loan. While you may be able to get a lower rate at the onset with an open variable-rate mortgage, they can often lead to volatile payments, which makes budgeting more difficult. Instead, a fixed-rate mortgage offers more financial stability.
Don’t Avoid The Stress Test
While the mortgage stress test can be a annoying and difficult test to pass, it can help you from being house poor. A mortgage stress test evaluates whether you can afford your mortgage payments if interest rates were to rise.
Pay Down Your Debts
Before applying for a mortgage, take some time and make an effort to pay down your debts. While this may not be easy, it can open up your finances and make managing mortgage payments a bit easier.
Have An Emergency Fund
It’s impossible to predict if something will happen in the future that can cost you a lot of money. If your finances are already tight, you could find yourself in a position in which you may not be able to afford your mortgage payments. To avoid this, slowly build an emergency fund by making small contributions over time.
What Can You Do If You Become House Poor?
If you find yourself becoming house poor at some point, you should take immediate steps to rectify the situation. Here are a few steps you should consider.
Cut Back On All Non-Essential Spending
If you’ve become house poor and could potentially lose your home, cut back on spending right away. Look at your budget and pinpoint expenses that you can cut out. Start with non-important expenses such as unused subscriptions, they can often creep up on you. Then consider larger expenses you can slash such as gym memberships and takeout. Also consider cutting costs by shopping at thrift stores and no-frills stores.
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Dip Into Your Savings
If you have significant savings, tapping into it might be an option you want to think about. Just keep in mind that you should have at least 3 to 6 months’ worth of monthly expenses saved, including your mortgage.
If you choose this option, make sure you have a practical plan for how to get back on top of your mortgage payments and stay there.
Sell Your Home
If your situation is serious enough that could lead to mortgage default, then perhaps selling your home should be considered. While this may not be the most ideal option, it may have to be done to avoid foreclosure or Power of Sale. Speak with your mortgage broker or lender to discuss your options.
Dangers of Negative Equity
If your housing costs are taking out far too much of your income, and you start missing mortgage payments, you run the risk of entering ‘negative equity‘ territory. If this happens, you could find yourself in real trouble when it comes to time to sell your home or renew your mortgage.
Negative equity means you owe more than what your home is worth. For instance, if your home is currently valued at $750,000 but you owe $800,000 on your mortgage, that means you have $50,000 in negative equity. This is also known as being ‘underwater’ on your mortgage.
This scenario can happen in a few ways such as missed payments or your home value declining. Whatever the reason may be, having negative equity can make it difficult to sell your home or refinance your mortgage.
Bottom Line
Everyone’s budgets, incomes, and debt loads are different. To avoid becoming house poor, the best thing you can do is crunch the numbers to see how much of your income is going towards your debts. Then, see how much more room you may have to fit in mortgage payments and other housing costs. Steer clear of spending near the top end of what you can get pre-approved for to ensure you have enough of a financial cushion to afford other expenses, including unexpected ones that may creep up.
