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Are You House Poor?

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Are You House Poor?

Written by Caitlin Wood
Fact-checked by Caitlin Wood

Are You House Poor?

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Debt Mortgage

Being house poor is no joke. It means you can’t afford the home you’re living in and therefore are probably relying too heavily on credit to stay afloat. Which ultimately means you’re racking up even more debt that you can’t afford to pay back. See what we mean, being house poor is not good. But there is a light at the end of the tunnel; you have full control of your finances which means you can change your house poor status.

We want you to own a great home but we don’t want you to borrow more than you can handle. So let’s take a look at what being house poor means and what you can do to prevent or fix it.

 How to Tell if You’re House Poor?

As we discussed above, being house poor basically means that you can’t afford 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 circumstances.

  • Do you carry large balances on several credit cards?
  • Are you relying heavily on those credit cards to pay for necessities like groceries?
  • Have you given up family vacations or other travel opportunities because you need to make a mortgage payment?
  • Do you have to scrimp and save for months leading up to paying your property and school taxes?
  • Are you spending more than 30-35% of your income on housing costs?
  • Are you 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 are currently dealing with and what you want for your future.

The True Cost of Borrowing

Common Causes of Becoming House Poor

Choosing to purchase a house that is simply too expensive is definitely the most common reason why you might become house poor, but there are of course countless other reasons as well. Let’s take a look at a few of the other reasons and how they can be solved or avoided.

Letting your lender decide how much house you can afford

This goes hand in hand with purchasing a house that’s too expensive but it’s still an important point to make. When you apply for a mortgage you get approved for a certain amount of money but there is no rule that says you need to purchase a house that uses up your entire mortgage. If you have a steady job with a high income or are a two-income family then chances are you’ll be approved for a large mortgage. Just because the bank will give you the money doesn’t mean you need to spend it.

Decide on a budget you can comfortably afford then look for a house that fits that budget. Purchasing a $500,000 house simply because your lending will give you $500,000 is not a good idea.

Job loss or reduction in income

No one wants to think about losing their job but it happens. So when you decide to purchase a house you need to take into consideration whether or not you’ll be able to afford to live in it if you lose your job.

Unfortunately, we can’t predict the future but we can be prepared for it. Making sure you have enough savings to live off of for at least a few months will help you to continue to make your mortgage payments while you look for a new job.

No emergency fund or savings

Living in 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. Having an emergency fund will help you deal with any unexpected expenses.

Too much consumer debt

If you already have a significant amount of consumer debt before you take on a mortgage you could be looking at a seriously unstable financial future. Unfortunately, it is very likely that you’ll become house poor if all of your available income in going toward debt repayment.

To fix this issue you’ll need to consider paying off your debts before you purchase a house. While this may not fit into your plans for the future, purchasing a house when the rest of your finances are in order is without a doubt the best option.

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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 of the most important steps you can take to avoid becoming house poor:

  • The Government of Canada suggests that you spend no more than 30% of your income on housing costs. The first thing you should do is figure out what 30% of your income actually is. (P.s. 30% is a good place to start but aiming lower is even better)
  • Next, you need you to figure out what your housing costs will actually be, here’s a hint it’s more than just your mortgage payment. Think property taxes and school taxes, utilities, insurance, snow removal, lawn upkeep, emergencies, repairs and of course your mortgage payments.
  • Now you need to figure out how much you can afford to add to your monthly budget. Let’s say you’ve decided you can comfortably afford to allocate $3000 of your monthly budget to your housing costs. This means that all those expenses we listed above need to come to $3000 or less every month. Don’t even look at houses that are out of your price range.
  • You’ll also need to save up for those one-time expenses associated with moving into a house. This would be a down payment, closing costs, moving costs and potentially any repairs that need to be made before you move in.
  • It would also be advantageous for you to consider all those other costs that might not fall into the housing category. Car payments or public transportation costs, gas, car insurance, groceries, health care, cell phone bill, etc.
  • Finally, try living with your new budget before you purchase a house. This will not only allow you to get used to living with a potentially more strict budget but will give you time to make adjustments if you need to.

What to do if You’re House Poor?

While no one plans to become house poor when they purchase a new home, it is possible that you may find yourself spending more than you can afford on a monthly basis. If this is the case, here are a few steps you should consider.

Cut Back on All Non-Essential Spending

This goes without saying but if you’ve become house poor and could potentially lose your home, cut back on spending drastically. What you need to do is look for sneaky expenses that add up at the end of the month. Start there and then based on your lifestyle you should know what larger expenses you can cut.

Dip Into Your Savings

If you have significant savings, dipping into it might be an option you want to think about. Just keep in mind that you should have at 6 months worth of expenses saved beyond what you will use to help with your mortgage. Furthermore, dipping into your savings just to end up house poor again in a year is not a good idea. If you choose this option, you should have a practical plan for how to get back on top of your mortgage payments and stay there.

Can You Sell?

If you’re house poor because you purchased a home that was too expensive, you may want to consider selling. Obviously, this is not the best option especially for families with children in school. Consider speaking with your mortgage broker or lender to discuss your options.

Bottom Line

The most important thing to remember is that everyone’s budgets, incomes, and debt loads are different. And while the government suggests that you can spend 30% of your income on housing and still be in good financial standing, not everyone should take this advice. Owning a house is expensive and if you want to stay afloat you need to tailor your budget and savings to your unique situation.

Mortgage Glossary

Terms
Appraisal

An appraisal involves assessing the value of a property based on current market values and is conducted by an appraiser that is typically assigned by a lender. The appraisal is then used by the lender to determine whether or not to extend a mortgage to a borrower.

Bridge Loan

A bridge loan is a type of short-term loan that may be used to “bridge” the gap between carrying a mortgage on an existing home and covering the mortgage for a new home. These are usually obtained when the closing dates of a home sale and purchase overlap, requiring the seller to continue paying the mortgage on the existing home before it closes while paying the mortgage on a new home.

Canadian Housing and Mortgage Corporation (CMHC)

A governing body in Canada that oversees and executes several federal housing projects in relation to the National Housing Act.

Cash-Back Mortgage

A cash-back mortgage allows borrowers to obtain the mortgage principal and a percentage of the loan amount in cash, which can come in handy to cover the cost of certain expenses, such as making home improvements or paying for car repairs. Rates on these types of mortgages tend to be higher compared to other home loans.

Closed Mortgage

A closed mortgage allows borrowers to prepay only a certain amount of the principal without being charged a prepayment penalty fee. Fixed-rate closed mortgage prepayment penalties are usually 3-months’ worth of interest or the interest rate differential, whichever of the two is greater.

Closing Costs

Before a real estate transaction closes, certain closing costs will need to be paid, which can include real estate commissions, lawyer fees, land transfer taxes, appraisal fees, home inspection fees, adjustments, and others.

Conditional Offer

A conditional offer is not yet final and means that there are certain conditions that must be fulfilled by the buyer, seller, or both before the sale is considered “firm.” For instance, an offer could be conditional on the home being inspected, which the buyer must be satisfied with.

Construction Mortgage

A construction mortgage allows borrowers to finance the cost of construction of a new home or major renovations.

Debt Ratio

Your debt ratio determines your ability to pay off a mortgage by measuring your debt relative to your income. Lenders look at debt ratios to assess a borrower’s ability to make mortgage payments. A high debt ratio means your debt load is too high relative to your income. Gross debt service ratio refers to your debt that does not include a mortgage payment, and total debt service ratio refers to your total debt including mortgage payments.

Deed

A deed is a document signed by the seller that transfers ownership from the seller to the buyer.

Down Payment

A down payment is the money that is put toward the purchase price of a home. The required down payment will depend on a number of things, such as the type of mortgage being taken out and the cost of the house.

Firm Offer

An offer goes “firm” after all conditions have been satisfied and signed off by all parties. A sale can also be immediately firm if no conditions are included.

Fixed-Rate Mortgage

A fixed-rate mortgage means that the interest rate does not change throughout the entire mortgage term. Even if posted interest rates go up or down during the term, your rate will be locked in and stay the same until the term ends.

Foreclosure

Foreclosure is an unfortunate situation in which a homeowner loses possession of the title of their home as a result of mortgage payment defaults. When mortgage payments are missed, the foreclosure process may begin after a certain number of days have passed. In this case, the lender can take over the home under a “power of sale,” after which the homeowner may still have a chance to make good on their mortgage payments and bring their debt up to par. Otherwise, the lender may make efforts to sell the property to recover any money they are owed.

Gross Debt Service Ratio

A gross debt service ratio is the measure of housing-related debt relative to a borrower’s income. GDSR is a factor that lenders consider when determining whether or not to approve a mortgage application.

High-Ratio Mortgage

A high-ratio mortgage refers to a mortgage in which the principal is greater than 80% of the property’s value. That means more than 80% of the home’s value must be borrowed in order to buy a home, while the down payment is less than 20% of the property value. High-ratio mortgages require mortgage default insurance to be paid.

Home Buyers’ Plan (HBP)

The First-Time Home Buyers’ Plan (HBP) is a government incentive program that allows first-time homebuyers to withdraw up to $25,000 from their Registered Retirement Savings Plan (RRSP) – or $50,000 in total for first-time home buyers and their partner – to buy or build a home. The full amount withdrawn must be repaid within 15 years.

Home Equity

The equity in a home represents the value of the property, less total outstanding debt, that the owner actually owns outright. It is calculated by subtracting the total mortgage loan amount still owed by the property’s value.

Home Equity Line of Credit (HELOC)

Using the equity in your home, you can secure a line of credit that uses the equity as collateral. The credit limit is usually equivalent to a particular percentage of your home’s value and there is a set date when the loan must be repaid. If you default on this kind of loan, the lender can repossess your home and sell it to cover the owed debt. Since there is a high risk with this type of financing, it is typically used to finance big purchases such as home improvements, education, or medical expenses.

Home Inspection

Many conditions can be inserted into a purchase agreement, including a home inspection. The home inspection allows buyers some time to have the property assessed by a professional to uncover any potential issues with the home before the buyer is obligated to complete the purchase.

Interest

Interest is added to the principal amount of the mortgage and is paid to the lender in exchange for access to the funds needed to complete a real estate purchase. Interest is charged from the moment the money is received to the moment the term expires.

Land Transfer Tax

Land transfer taxes are charged by the province in which the property is being purchased, as well as in certain municipalities. It is a type of tax that is based on the purchase price of the property, though these taxes vary by province. First-time homebuyers are sometimes exempt from paying the entire land transfer tax amount and may be eligible for a rebate.

Maturity Date

The maturity date is the date when the mortgage term ends. It is at this point that the mortgage must either be paid in full, refinanced, or renewed for a new term.

Mortgage

A mortgage is a loan that is provided by a lender to help a homebuyer complete a home purchase. Lenders provide a certain amount of money required to cover the cost of a home’s purchase price while charging interest on the principal amount. The loan is collateralized by the property itself. The mortgage must be repaid according to the terms of the contract. If the loan amount cannot be repaid according to the terms, the lender has the right to repossess the property and sell it to recoup any losses.

Mortgage Broker

A mortgage broker is a professional who works on behalf of the borrower and finds the best mortgage product and lender among their network of lenders.

Mortgage Default Insurance

Mortgage default insurance is designed to protect the lenders when a borrower is unable or unwilling to repay their mortgage. This is applicable to high-ratio mortgages where the down payment amount is less than 20% of the purchase price of the property and does not apply to conventional mortgages. Borrowers are responsible for this payment.

Mortgage Discharge

A mortgage discharge is issued by the lender when the mortgage is paid off in full by the borrower. When the mortgage is fully repaid, it is discharged from the title to the property and certifies that the property is completely free from the mortgage debt

Mortgage Life Insurance

Mortgage life insurance is an optional policy that borrowers may take out. It is designed to reduce or pay off the mortgage amount (up to a certain amount) in the event of the borrower’s death.

Mortgage Payment

A mortgage payment is the regular payment borrowers are required to make to pay off their home loan. These payments can be made monthly, semi-monthly, biweekly, or weekly, and include both principal and interest.

Mortgage Pre-Approval

A mortgage pre-approval involves having your credit and finances checked out before you formally apply for a mortgage once you agree to purchase a particular home. It allows you to find out how much can be afforded, how much the lender is willing to lend, and the interest rate that may be charged. Pre-approvals expire within 90 to 120 days after they are issued and are not a guarantee of final mortgage approval.

Mortgage Principal

The mortgage principal represents the amount of money borrowed from a lender and does not include the interest portion.

Mortgage Statement

Lenders typically submit a mortgage statement to borrowers on a yearly basis that details the status of the mortgage, including how much has been paid and the principal on the mortgage that still remains.

Mortgagee

The mortgagee is a mortgage lender.

Mortgagor

The mortgagor is the borrower.

Multiple Listing Service (MLS)

The Multiple Listing Service (MLS) is a database of listings where real estate professionals market properties they have for sale and search for properties for sale for their clients.

Offer

The offer represents the purchase agreement that the buyer submits to the seller and that the seller can either accept, reject, or negotiate with the buyer. The offer includes the offer price, deposit amount, closing date, conditions, and other items pertinent to the transaction.

Open Mortgage

An open mortgage allows borrowers to repay their loan amount in part or in full without incurring any prepayment penalty fees. Open mortgages tend to have higher interest rates compared to closed mortgages but are more flexible. 

Posted Rate

The posted rate is the lender’s benchmark advertised interest rate for mortgage products offered. These are not necessarily set in stone, but may be negotiated with the lender.

Prepayment

Prepayment is made when some or all of the loan amount is paid off before the end of the mortgage term. Most open mortgages can be paid off early without any prepayment penalty charges, but prepaying a closed mortgage typically comes with a prepayment charge. However, most closed mortgages allow an annual prepayment of anywhere between 10% to 20% without any penalty.

Prepayment Charge

When all or part of a closed mortgage is paid off before the end of the mortgage term, a prepayment charge may have to be paid to the lender.

Prime Rate

The prime rate advertised by a lender is typically based on the Bank of Canada’s interest rate that is set each night, which may change at any time.

Property Insurance

Property insurance must be paid on a home throughout the mortgage term. Lenders require a policy to be held on a property before they agree to extend a mortgage, and the lender must be named on the policy. This type of insurance covers the cost of any repair or replacement as a result of damage to the home from fire or other disasters.

Property Tax

Property taxes are paid by homeowners to their respective municipalities to cover the cost of things such as police, garbage collection, policing, schools, and fire protection. The property tax amount paid is based on the property’s value and the rate charged by the municipality.

Qualifying Rate

A qualifying rate is the interest rate that a lender uses to assess a borrower’s eligibility for a mortgage and to calculate your debt-service ratio.

Renewal

When the term of a mortgage expires, another term may be negotiated with the lender. If the mortgage is not renewed, it must be paid off in full.

Reverse Mortgage

Homeowners over the age of 55 can use a reverse mortgage to borrow as much as 50% of the home’s value to be used to pay for other expenses. Payments are not made on a reverse mortgage, but interest can accrue on the loan amount until the property is sold or until the homeowner passes away.

Second Mortgage

A second mortgage may be taken out on a home that already has a mortgage on it. The funds accessed through a second mortgage from the home’s growing equity may be used to cover other expenses, such as home renovations, but they carry more risk than first mortgages.

Statement of Adjustments

The statement of adjustments outlines the purchase price, deposit, and any financial adjustments that are required for taxes, utilities, or condo fees that have been prepaid by the seller and payable by the buyer to compensate the seller for fees already covered on the home.

Survey

A survey is a plan of the property’s lot that shows the lot size and where the property boundaries and building structures lie. It will also show where any easements, right-of-ways, or overhanging structures from adjacent properties that could impact the value of the home.

Term

The mortgage term is the period of time that you are committed to your mortgage with your lender, including the interest rate. When the term expires, the mortgage either needs to be paid off in full, refinanced, or renewed, either with the same lender or a new one. The average term is 5 years, though it can range anywhere from 1 to 10 years.

Title

Title is the ownership provided to a homeowner when a property is purchased. A clear title is required by lenders before a mortgage is extended. If there are any issues with the property’s title, they must be resolved before the transaction closes.

Title Insurance

Title insurance is meant to protect lenders and buyers from issues on the title that are discovered after the transaction closes. Title issues can include title fraud, encroachments, municipal work orders, or zoning violations. If title insurance is purchased, it will be added to the closing costs.

Total Debt Service Ratio

The total debt service ratio refers to the percentage of gross annual income needed to cover all debts in addition to the mortgage payments (including principal, interest, taxes, utilities, and more).

Variable-Rate Mortgage

With a variable-rate mortgage, the interest rate will fluctuate based on a financial index. Monthly payments could remain the same, but the amount paid toward interest versus principal could change. If rates increase, more money is paid toward interest, but if rates decrease, more money goes toward the principal.


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