How to Avoid Being House Poor
It’s no secret that owning property in Canada can be an expensive game.
You will have to pay for the property itself, keep the whole thing maintained, and contend with a huge range of different utility bills, all of which will sap your income.
Homeowners will often fall into the trap of assuming that their home will get cheaper over time, only to find that it’s costing them more and more to keep the place afloat.
This is what is known as being “house poor”; your financial resources tied up in a physical asset (your home) that costs enough each month to leave you feeling out of pocket.
Houses that are worth millions can be owned by people who struggle to make ends meet each month, with large and expensive properties often making the problem even worse.
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How Do Homes Get More Expensive?
The idea of your property getting more expensive can be confusing, though it will start to make more sense as you explore the reasons for this.
People can easily make mistakes when planning their finances, and it can be easy for things to take you off guard, but having an understanding of the challenges that homeowners face can prepare you for this.
Mortgages Force You Into Further Borrowing
Mortgages have caused a lot of problems for banks in Canada over the last few decades, and this means that many lenders have tightened their rules to ensure that people can always afford their loans.
They will always ask for a deposit for your new home, with some asking for as little as 5% of the property’s value, and others requiring much more.
This means that you would need to pay at least $10,000 up-front for a home that costs $200,000.
It can take a long time to save up this money, forcing most people to direct all of their financial resources to it.
Once you’ve secured your mortgage, though, you won’t have this money anymore, and this could force you into further debt if you have to take out more loans to cover the costs of living.
Having more loans will always mean that you’re paying more in interest.
Property Repairs & Improvements
With saving up for your home’s deposit being so difficult, people will often look for ways to save money on their home.
Buying a place that needs work done to it can be a good way to achieve this goal, but could also end up costing you a small fortune if you’re not careful.
While replacing something like a boiler will make your heating bills go down, you won’t have any savings to cover this improvement and would have to borrow more money to do it.
The interest and monthly payments you have to make on this could end up being far more than your heating bill.
New Loans Are Impossible To Pay Back
As your home forces you to take out loan after loan, the amount of money you’re having to pay each month will skyrocket.
With increasing monthly payments to cover, this can leave you unable to cover the cost of your new loans.
Some lenders will be happy for you to simply pay the interest you owe if you find yourself in this position, though this will leave you with a loan that never gets smaller.
The longer you’re stuck in this position, the more you will have to borrow to afford your lifestyle.
Unexpected Financial Challenges
Predicting the world of finance is a skill that very few people possess.
Cars can break down and need repairs, unexpected bills can come from nowhere, and many people find themselves shocked to see how much they’ve spent at the end of a month.
Having a mortgage, bills to pay, and other home-related commitments will make it incredibly difficult to keep on top of issues like this.
Saving Yourself From Being House Poor
Owning a home can be a costly affair, and many people end up in trouble when they take the wrong steps in this process.
You shouldn’t let this dash your dreams of homeownership, though, as you can avoid most of these issues with some simple tips.
It’s important to keep all of this in mind as you go through the process of borrowing money, as its all too easy to make assumptions that could cost a small fortune.
Make Negative Assumptions
People often make assumptions about their finances that can lead them into trouble.
For example, it can be easy to assume that your house value will go up if you buy it during a period of low prices, enabling you to refinance the property to get more out of it down the line.
In reality, though, it will be safer to assume that the value of your property will go down or won’t change at all.
Plan What You Have To Pay
It’s common for new homeowners to be surprised at the cost of their new home.
Before you enter a commitment like this, you need to ensure that you have everything in place to be able to handle it properly, including bills, maintenance costs, and any contributions towards local public areas that you have to make.
This will differ from house to house, making it crucial that you think about the property you’re buying.
Plan For Emergencies
While it might be hard to perfectly plan for each situation you find yourself in, you can still prepare a safety net that will protect you when you find yourself in financial difficulties.
Having some money saved up will make it easier to deal with surprise repairs, time out of work, and any other costs that life could throw at you.
Having three months of your income saved can be a great way to handle this.
Is It The Right Time?
Finally, as the last tip, it’s time to think about whether or not you’re ready to buy a home.
A year or two more of saving could enable you to improve your income, take control of your budget, and plan for the costs that will come with your new home.
You never have to rush into something like this, and a little bit of time can save a lot of pain down the line.
Planning Your Finances With Bankruptcy Canada
Here at Bankruptcy Canada, our expert team has more than two decades of experience working with money.
From filing a consumer proposal to helping you to design a budget, our friendly team is always happy to work with people across Canada.
If you’re struggling to decide whether or not you should buy a home, or are dealing with the fallout of a home purchase, we encourage you to get in touch.
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