In today’s economy, it’s not uncommon to hear the term “house poor”. With that in mind, though, what exactly does that term mean? Well, house poor means that you’re spending the majority of your income on your housing costs and have very little left to afford other essentials.
You may also be considered to be becoming house poor if you’re changing your lifestyle to afford your home. No longer eating out or ceasing other things you like to do to afford your home also indicates that you’re spending too much money on your home.
To avoid this, it’s important to pay attention to your monthly income. Your net monthly household income determines how much you can realistically afford without being house poor.
The Costs of Owning a Home
In this housing market, how much houses cost makes it difficult for people, even those with six-figure incomes, to afford their dream home. While it may still be doable, doing so can lead them to become house poor, also known as cash poor or house broke. That doesn’t mean you can’t purchase a home, though. You just might have to start small and work your way up. This way, you can avoid the house-poor trap and become house-rich.
When it comes to purchasing a home, there are costs to consider beyond just your mortgage payment. Unfortunately, it’s not that black and white. You also need to consider a bunch of other hidden costs. Here’s a look at a few that many people don’t realize can drastically impact their budget.
Utilities
The utility costs of a home can really make or break your budget. You need to consider the costs of electricity, gas, and cable, as well as any other costs that may be required. You also need to consider the average costs for your home. Each home will have a different cost, and the company providing the service will likely have a history of these costs for you to figure out your budget.
Property Taxes
No matter what kind of property you purchase, you will have to pay property taxes. And while you’ll have access to the history of the property taxes for the property, it’s important to remember that property tax rates usually increase annually. You also need to decide if you want these costs added to your mortgage payments or if you want to pay them directly to the municipality yourself.
If you choose to pay the property taxes directly to the municipality, then you have two different ways to pay them. You can pay them once a year when the property taxes are due, or you can break them down into monthly payments. Either way, the amount is going to be the same. Even though you won’t be able to determine the exact amount every year, you’ll be able to come up with an educated guess.
Strata and HOA Fees
Due to the increased costs of housing in Canada, many are having a hard time purchasing single-family homes. For this reason, we see a lot more townhomes, mobile homes, and condos as the preferred option. Even though these types of homes are cheaper, you do have to factor in the cost of strata fees, HOA fees and even pad rental. These costs can range anywhere from $100 to $1,000 per month. In fact, even with some single-family homes, you still have to consider the monthly cost of HOA fees.
Maintenance
One cost that many homeowners don’t consider is maintenance. Even if you purchase a home that isn’t in need of any renovations, maintenance costs will still occur. This can be anything from a new roof to a hot water tank or even a furnace. It’s essential to keep in mind that these are just some of the larger costs, though. There are also smaller costs that occur all the time.
Home Insurance
Home insurance is an item that every homeowner should purchase. Depending on your mortgage conditions, it may even be required. This cost can be broken down into monthly payments or paid in full. Either way, you’re looking at a cost of around $1,000 to $2,000 per year. Depending on the home and where it’s located, the costs can be even higher.
Interest Rates
When you’re purchasing a home, it’s very important to pay attention to the interest rates. These can really affect you, depending on the rate you choose for your mortgage. Variable rates change based on the Bank of Canada’s prime rate and can change your monthly mortgage payments at any time. If you selected a different type of variable mortgage, then they can just change how much of your set payment goes towards your interest versus your principal. Rising interest rates can really impact the costs for variable mortgages.
Another important factor to consider about mortgage rates is that they’re only preset for a selected mortgage term. For the typical mortgage, this term is usually 5 years. Once those 5 years are up, then you need to re-sign the terms of your mortgage, which can change your interest rates as well as your monthly payment amount. This is why it’s important not to max out your monthly budget right away.
Signs That You’re House Poor
The biggest clue that you’re house poor is that you’re no longer able to afford the things that you used to. You have to stop eating out and change your monthly budget in order to make ends meet. Also, you might find yourself using your credit cards more often and barely being able to afford the minimum payments. If you find yourself in this situation, it’s actually not as bad as you may think. However, changes have to be made in order to correct this.
Is Being House Poor Worth It?
For most people, being house-poor just isn’t worth it. The financial impact and stress can really impact your overall well-being. It can make it difficult to enjoy what you have and live in constant dread if any repairs or maintenance are needed. This is why many people choose to purchase an alternative house like a modular home, a condo, or even a townhouse instead of a single-family dwelling. It’s also the reason that many choose to rent instead of purchasing.
Ways to Avoid Becoming House Poor
While the thought of becoming house poor can actually be terrifying for your financial future, there are actually plenty of different things you can do to avoid this. These include:
- Putting down a larger down payment on your principal balance (becomes part of your home’s equity)
- Creating an emergency fund
- Purchasing mortgage insurance in case of disability or death
- Increase your monthly income
- Create a budget
- Keep your housing costs below 30% of your income
Really, the best thing you can do to avoid becoming house poor is to be informed. Know where your money is going and save money for a rainy day. That way, if anything happens, you don’t have to rely on credit to help you out. You can use the funds in your account to help you out and avoid having another financial burden.
It also helps if you’re prepared. We all know that health isn’t guaranteed, and you can’t always rely on living paycheck to paycheck. One way you can help with this is to purchase insurance. Many mortgage lenders will provide an option to purchase mortgage insurance on your home. In the event that you’re unable to pay your bills due to job loss, this insurance will cover the cost. That said, you don’t have to purchase this through your lender. You can also choose to purchase private mortgage insurance on your own.
Another thing you can do to keep your budget low is to purchase below what you can afford. By doing this, you’re able to reduce your overall expenses and have enough funds in case of an emergency. Having too much of your monthly income invested in your home can start creating problems before you know it. This is why it’s recommended that you don’t spend more than 30% of your monthly income on your home. Ideally, you want about half or nearly half of your income going towards your total living expenses, so you still have money left.
How to Budget for a Two-Person Household
When you’re looking at purchasing a home for a two-person household with two incomes, the first thing you want to do to determine your financial flexibility is look at what your total combined net monthly income is by creating a household budget. This amount will determine how much you’re able to spend every month. Once you’ve done that, the next step is to determine your household expenses or your housing affordability based on rising costs and current home prices.
In order to avoid becoming house poor, it’s ideal to keep your household expenses below 30%. For example, say your monthly combined household income is $8,000 per month; then your total monthly housing expenses shouldn’t be more than $2,400 per month. From there, you need to determine all of your other expenses. Once you’ve done this, then you’ll know how much money you have as well as how much you can save in your bank account per month for unexpected expenses or whatever else comes up.
How to Structure Your Financial Obligations
When it comes to budgeting for your personal finance obligations, it’s all about how you structure your cash flow. However, starting to budget can be the most challenging part. The simplest thing to do is start tracking your expenses. By doing this, you’ll be able to figure out your debt-to-income ratio, what your housing costs are, and what your other living expenses cost.
Once you’ve determined what your costs are, you can start figuring out what’s important and what costs are unnecessary. Keep in mind that this is based on your monthly net income and not your monthly gross income. Then you want to make categories from most important to least important regarding your monthly expenses. Something like this:
- House payments
- Other household expenses (like utility costs, homeowners insurance and mortgage insurance)
- Monthly debt payments (including personal loans, credit card debt, and other debts)
- Every day living expenses
- Transportation costs
- Emergency fund savings
- Retirement savings
You’ll notice that we start with housing costs and then move on to other financial obligations. This can be structured however you feel, but housing costs are considered to be the priority. However you choose to use this structure, it can help you reach your financial goals and verify that you have enough money for unexpected circumstances. It can also show you what you can realistically afford to avoid struggling financially.
What To Do If You’re House Poor?
If you do find that your house poor, there are a few things that you can do in order to relieve some of the stress and relieve the burden on your finances. The first thing that you can do is downsize. If you’re able to sell your home and move into something more affordable, then that might be a good option. If not, then you could always consider refinancing. You may be able to get a better interest rate and reduce your monthly payments.
If you’ve incurred a lot of debt trying to afford your home, another option might be to consolidate your debt. This can bring your monthly payments down low and reduce the total amount of your expenses every month. It can also reduce how many payments you make since the number of bills you have will also be reduced.
For those who don’t want to sell but need some financial relief, getting a second job might be a good option for you. Not only can this help supplement your income to afford maintenance, your current bills and even unexpected costs, but it can also free up some money to manage your debt and even start saving for emergencies.
Final Thoughts
When it comes to purchasing a house in Canada, you need to pay attention to your net monthly income and not your gross monthly income. This will give you the most accurate amount that you’re able to spend every month. From that amount, it’s recommended that only what you use for your household expenses is 30% of your monthly income.
With housing being so expensive in Canada right now, it’s understandable that so many people are feeling the pinch. That said, though, there are many things you can do to protect yourself and your financial situation. Just a little preparation can go a long way.
