What does it really mean to become house poor? Are you only in trouble if you’re missing mortgage payments?
Traditionally speaking, being house poor means you are spending a large portion of your total family income on home ownership costs. When this happens you end up short on cash to spend on other things. A common measure says that if you are spending more than 35% of your income on housing related costs, then you are at risk of being unable to balance both your housing costs with other needs and wants.
The funny thing about debt is that you don’t plan on things getting out of control. Unfortunately that’s often what happens. Next thing you know, you find yourself unable to meet your mortgage payments.
The House Itself Is The Problem
Not everyone becomes house poor because they bought more home than they could afford at the outset. Divorce, job relocation, empty nesters on a fixed income can all face an issue of owning more home than they can afford to maintain.
The solution here may be to make the hard decision to downsize. Yes you can try to increase your income to compensate but then you are still technically ‘house poor’. Do you really want to give up all your spending flexibility just to make mortgage payments?
Another factor can be unexpected repairs. You find out your house needs a new roof or has a leaky basement. Landscaping or upgrades may have cost more than you anticipated. Now all of a sudden you are faced with expenses that may have to be financed if you don’t have emergency funds to fall back on.
An adequate emergency fund is the best defence against additional home costs. Relying on credit is a one way ticket towards overwhelming debt payments. It may even be necessary to sell your home rather than invest in something you can’t afford in the first place.
Your Budget Changes
Being able to keep those housing costs below the 35% threshold means you need both adequate income and you need to know what your costs will be over the long term. There are risks to both numbers. One spouse may decide to stay home longer than anticipated after the birth of a child, you may be laid off work or face a reduced income due to an illness. Next thing you know you are relying on credit cards or missing mortgage payments because you didn’t have enough income to keep up.
If you’re thinking of starting a family, plan ahead. Set aside some extra funds to make mortgage payments during your maternity leave. No matter what the reason, adjust your living expenses to match your income situation. Don’t use credit as a stop gap.
One of the biggest risks to your housing budget is that your mortgage payment will become more expensive as interest rates rise. Interest rates have stayed fairly steady over the past several years now in Canada and we’ve been lulled into a false sense of security. The bad news is rates are going to increase at some point, it’s just a matter of when. The real question is are you prepared?
Consider changing your mortgage payment today from monthly to semi-monthly or even weekly. It will have little to no impact on your cash flow but will reduce your mortgage faster. That way when interest rates increase you are working off a lower outstanding principal to begin with.
You’re Already In Debt
If all you owe is your mortgage and your payments are manageable good for you. But if you’re also carrying credit card debt, student loans, car payments or other bank loans you could soon find yourself in a struggle to keep up with your mortgage payments.
If you already carry more debt than you should, pay off your debt. Create a budget that will allow you to keep up with your housing costs while you pay down that debt. If you want to keep your home, you need to know your other debts aren’t going to get in the way.
Are you tied to your house? What options are you considering?