If someone is house poor, they have a house they cannot afford. People who are house poor did not calculate all the costs of buying their home. They are now living in a home they are struggling to repay and upkeep. They might not even be able to save for the future. A financial situation this precarious can easily lead to financial disaster.
These house poor people did not make wise financial decisions. Arranging a mortgage must be a decision the buyer takes seriously. A mortgage is probably the largest financial transaction most people will take.
The mortgage must be considered as part of the overall financial plan. Many house poor people saw their mortgage as a separate transaction. But the house rich are people who used their mortgage to improve their net worth.
Signs of being house poor
Increasing debt is an indication of being house poor. Relying on credit cards for ordinary household expenses like groceries is a sign that expenditure is uncontrollable. Expenditure must be cut to avoid financial disaster.
Viewing the home as a retirement plan is an indication of house poverty. It's essential to contribute to RRSPs and a savings account as well. Homeowners should be able to repay their mortgage and still make other savings, no matter how modest they may be.
A lack of financial safety net is another sign of being house poor. Living paycheck to paycheck is a very precarious way to live. Loss of employment, illness, or divorce can mean mortgage repayments are not met. If there are no savings, even just a few months of unemployment could lead to foreclosure, or even bankruptcy.
Being unlikely to repay the mortgage before retirement is a sure indication of house poverty.
How to avoid being house poor
To ensure that you can really afford the home you want, you must calculate all the costs involved. Mortgage repayments are definitely not the only costs of home ownership. Taxes, maintenance costs, higher utilities, and higher insurance must also be considered. Decorating and even gardening costs must also be factored in.
Working out your budget is essential, even before you start to look for homes. You must make sure you know how much you can afford to spend. If the mortgage you would need is not within your means, then do not purchase the house, even if you are offered the mortgage.
Ensuring you have 20 per cent of the purchase price will help you become house rich. This means you won't have the additional expense of mortgage insurance. It is also much more likely that you will buy a home you can actually afford.
Prioritizing mortgage repayments means you are more likely to be able to repay your mortgage before retirement. This could mean you must make sacrifices, perhaps curtailing vacations rather than purchasing your flights and hotels on credit.