06 Sep 2016

The Risk of Being House Poor in Canada and How You Can Avoid It

Most Canadians have stopped worrying about where they live, as owning a home can take them from thriving to just surviving. Even people living far from the hottest real estate hubs of Canada, Toronto and Vancouver are finding it difficult to pay their mortgage money and are in deep debt.

With low interest rates, money was easily available earlier. As these conditions started to change most people found it difficult to continue owning a home. With the job market slowing down and people losing their jobs, things slowly started going downhill for most people. The guidelines for housing affordability are usually not followed.

Toronto Real Estate Housing Affordability

• Avoid spending more than 30% of gross income.
• 25% of Canadians spend more than the stipulated 30%.

MLS Listing

Most toronto real estate agents and realtors calculate the maximum of what people can afford. This can lead to a lot of issues. It affects not just people in debt but others too. If the housing market in Canada drops to any level or if the interest rates go high, then people may find it hard to repay.

Selling a home is a last option and most homeowners want to avoid it. This often leads people to the possibility of been “house poor”. This can cause a lot of physical and emotional stress to families dealing with such a situation.

Definition of “House Poor”

House poor is a term that describes a homeowner spending the majority of income on housing costs. This may include insurance, mortgage and taxes. Most experts suggest spending 25% – 40% of monthly budget on housing costs.

As per these standards anyone spending more than 40% of their income on housing costs is house poor. It is advisable to keep housing costs below 25% of the monthly budget to avoid such a scenario.

A homeowner making mortgage payments and unable to afford any kind of repairs may also be considered house poor. In such a situation the homeowner is able to make the mortgage payment but cannot afford to replace a fallen roof or fix a broken toilet or pipes or fix a damaged fence.

In U.S most people are tempted to take loans for major repairs. The loans then slowly start piling up and within no time you are under a mountain of debt. This can also lead to a situation where the homeowner becomes house poor.

Situations that cause homeowners to become house poor

Buying out of their means

Most families buy a large home by financing more than what is needed, just because it was available. The other reason that they may end up buying too much house is that they wanted to live in a particular neighbourhood and this can be expensive. In both cases they end up living above their means.

The solution to such a scenario is that they need to sell the home and buy something that is affordable and within their means. The other option is that they have to raise their income levels, so that the housing costs are within the 25% affordability range. The couple may have to take a higher paying job or stay at home moms can try home business opportunities.

Dip or loss in income

If you have a job change or disability, you may find that your income levels have dropped. Irrespective of what led to an income drop you may find it hard to make the mortgage payments. You may not be able to pay for kind of repairs too.
If you are facing such a situation, you may have to raise your income levels fast or if that is not happening, you may have to sell. It is best to sell the home, if you have not been able to improve on your income even after repeated attempts.

No Savings

Maintaining a home does not come cheap. New roofs and fence, A/C units and other such appliances are costly. Even a pest control service can cost you a lot of money. Each repair cost tends to add up with time. The best example: As a Toronto real estate homeowner you should not be surprised if something breaks or stops working. All things wear out with time and you should be prepared for such a scenario. In such instances you need to save money for repairs.

Lack of money for repairs

If the money that the homeowner is earning goes directly for payment of mortgage and entertainment, then there will be nothing left for repairs. The homeowner may not be able to make the payment for the necessary repairs in cash or they may be spending the money on other things.The best solution for this is to create a household item in the budget that is specifically marked for repairs. Start maintaining things, so that any kind of damage to things is avoided. Fix broken things immediately instead of letting them accumulate for years.

Debt

When the homeowner is in debt, the money that can be utilised for repairs and other things goes directly to debtors. Repair and fix things that you can afford even when paying off the debt. After the debt is paid, you can fix the home with cash that you have managed to save. The other option is to sell the home and stay on rent, so that you do not have to worry about paying for repairs anymore.

Being house poor can cause a lot of mental strain to the homeowner. When you see broken stuff around the home, it can be a frustrating experience. You are constantly worrying where the money is going to come from and this can cause much stress.
The best advice for homeowners is that they should live within their means. This ensures that they save enough for repairs. When homeowner raise their income levels and diligently save they may realize the dream of owning a home easily.

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