17 Jan Avoid the “house poor” trap
We’ve said it many times: owning a house is almost everyone’s dream. We feel accomplished, it gives us a sense of responsibility, we feel like we have our own space. So, it’s only normal that we make a list to plan the house of our dreams. But it is also one of, if not, the biggest investments of our lives. It needs to be well planned, we need to account for surprises and enjoy the investment we make.
Having said this, one of the biggest issues we can find ourselves in is the so-called “house poor trap”. What exactly is it? Basically put, you are considered house poor when most of your income goes towards your housing expenses, leaving with very little for savings, for an emergency or for miscellaneous spending. How do you get to this situation? Well, if you buy a property above what you can really afford.
When planning to buy a house you need to think about all the scenarios: if most of your income is going towards your mortgage payments and bills, then you may want to consider looking for a house that is smaller or less expensive. You never know when a job loss can occur, or an illness… any of these surprises will bring sudden changes to your financial life. If you’re already putting most of your income towards the house expenses, you will be facing serious problems.
How can one avoid this situation?
Well, before you decide on which house to buy consider the following: purchase below what you can afford – in case rates rise unexpectedly; think about retirement – if you can’t save money due to housing expenses, you may have problems later on in life; take on a smaller mortgage loan – especially if one of those surprises occurs; think long term – the mortgage stress test does not look at personal spending, so a financial budget for homeownership should reflect your own spending habits. Last, but not least, don’t forget that owning a home comes with renovations, maintenance, sometimes emergency repairs that need to be accounted for.
We can help you budget in a way that you will avoid the “house poor” trap.