Achi news desk-
The journey to home ownership can be very exciting, especially with your realtor selling you dreams of the perfect home.
However, it is important to avoid the trap of becoming housing poor — a situation where a large proportion of your income is eaten up by housing costs, leaving little for other aspects of life.
Below, I will explain some practical strategies to maintain better financial health while owning a home. With careful planning and smart decisions, your home will enhance your quality of life, not limit it.
What does it mean to be poor in the house?
The next time you drive through a nice neighborhood to admire the homes, take a moment to consider how much the homeowners are paying to live there:
- What is their mortgage payment?
- How much do they pay for weekly landscaping?
- Do they have to pay condo fees?
- What is their annual property tax?
- What are their annual maintenance costs?
Buying a home is often presented as a more affordable alternative to renting. If you were to compare monthly rent with mortgage payments on the same property, the mortgage payments would almost certainly be less.
However, as the property owner, you will also have more financial obligations. You will be fully responsible for maintenance, taxes and repairs – all of which you should account for extra in your monthly housing budget.
If you fail to do so, it is easy to find yourself house poor, with a large proportion of your monthly income going towards living expenses, and little left for savings, investment, or do other things you enjoy.
It is also important to consider how mortgage interest rates change over time. For example, many Canadians are facing significant increases in mortgage payments this year, as renewal rates reflect today’s high interest rates.
How to avoid being house poor
The good news is that being a home owner doesn’t have to make you poor. The key is to plan and budget properly so you don’t find yourself in over your head.
1. Create a budget before you buy
Before you even start looking for a home or work with a realtor, you should have a good idea of ​​what you can afford in terms of a monthly mortgage payment.
Remember that real estate agents are, at their core, sales professionals. As much as it’s their job to help you find something within your budget, it’s also their job to help you find a house you really love and sell it to you on all of its benefits.
Similar to buying a car, the home buying process can often lead you on an emotional journey, and you may be willing to go outside your budget for the perfect home.
As much as we encourage you to find your dream home, make sure you also evaluate your options logically, with your budget in mind.
2. Estimate home ownership and utility costs before you buy
Remember, your mortgage payment won’t be your only cost.
You will have to include utilities such as electricity, water, and internet. The bigger your house, the more your space will cost to heat in the winter and cool in the summer. Larger homes may also need Wi-Fi extenders to ensure the entire home has coverage.
Then, you have to account for maintenance costs. Unless you’re a die-hard DIY professional, you’ll have to factor in monthly maintenance costs like landscaping, weed control, snow shoveling, and pest control, as well as plumbing, electrical, appliance repairs, or your roof every year.
The size of your property compared to the dwelling unit itself can also play a factor here. Larger, more rural properties may come with higher landscaping costs or require you to purchase a four-wheel drive vehicle so you can drive up and down your dirt driveway.
The age of the dwelling unit could also play a role in your maintenance costs, as older homes are likely to have more repairs in progress compared to newer buildings.
For example, a new roof could cost you $8,000 or more, and will usually be needed every 15 years. This means you’ll need to budget an extra $544 a year or $44 a month to account for unavoidable roofing costs.
Last, but not least, you’ll want to account for annual property taxes on the home as well as home insurance costs.
3. Use the 30 percent rule
To get the best picture of how much home you can realistically afford, it’s best to consider all the estimated costs, including:
- A mortgage
- Utilities
- Maintain and preserve
- Property taxes
- Home insurance
Your real estate agent or financial planner should be able to help you here, as long as you ask the right questions.
Many financial advisors recommend using the “30 percent rule” when it comes to housing. This rule advises keeping your combined living expenses under 30 percent of your income. Only about 20 to 25 per cent of Canadian homeowners exceed this, according to the latest studies by the CMHC and Statistics Canada.
If you are married or buying a home with a friend who will also contribute to your household income, you may be able to use your joint income to buy a larger home while still staying within your budget.
4. Make a bigger down payment
Although it may not be practical for everyone, making a larger down payment on your home will reduce your monthly mortgage payments, making home ownership more affordable in the long run.
What if you are already house poor?
If you’ve never had the chance to plan ahead and you’re already feeling the financial pressure, you have two different options. These could include refinancing your home at a lower interest rate, renting out an extra room or space on your property, or it may depend on downsizing by selling your home and moving to something more affordable.
Christopher Liew is a CFA Charterholder and former financial adviser. He writes personal finance tips for thousands of Canadian daily readers on his website Wealth Awesome.
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