What it means to be house poor and how to avoid it

Spending too much of your income on housing costs can result in you being house poor. We take a look at what this means and how you can avoid it.

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Buying a house can be an exciting prospect. However, spending too much of your income on housing costs could lead to a situation known as being house poor. What does this mean, and how can prospective homeowners avoid it? We take a look.

What does it mean to be house poor?

You are house poor if you spend a significant proportion of your income on housing expenses, including monthly mortgage payments, maintenance, utility bills and insurance, leaving insufficient funds for much else.

How do you know if you are house poor?

The following are indicators that you might be spending too much on housing at the expense of your general financial health. You could be house poor if you:

  • Find that your house expenses take up most of your income
  • Are frequently dipping into your savings to cover your monthly mortgage payments
  • Worry about whether you’ll be able to afford your monthly mortgage payments most months
  • Aren’t able to contribute to a retirement fund
  • Haven’t started saving up for an emergency fund
  • Can’t afford holidays or pursue other pleasures or goals

How do you become house poor?

There are two key reasons homeowners may find themselves being house poor:

  • Not understanding the true cost of owning a home
  • Unexpected changes in circumstances having a serious impact on their finances

The true cost of owning a home

There’s more to buying a home than just making monthly mortgage payments. You will need to account for maintenance costs, utility costs, insurance and other costs as well.

It’s not uncommon to find buyers failing to consider all the costs involved in owning a home and finding themselves in trouble when they can’t keep up with the monthly costs and payments.

This is why it could be in your best interest to seek the guidance of knowledgeable financial advisers and mortgage brokers when considering a purchase.

Unexpected changes in circumstances

It’s not unusual for people to lose jobs or encounter significant emergencies that put them in a difficult financial situation. The problem is that such circumstances are almost impossible to predict. That’s why it’s a good idea to have an emergency fund in place as a safety net before buying property.

Without such a safety net, if you encounter unexpected changes, you could have problems paying your mortgage payments and affording other house expenses. As a result, you could be forced to sell your property or even lose your home.

How can you avoid becoming house poor?

Naturally, the easiest way to avoid becoming house poor is to ensure that you can comfortably afford the property you want to buy.

The 50-30-20 rule provides a useful benchmark when considering your budget for buying a home. According to the rule, you should spend no more than 50% of your income on house expenses and other essentials. That leaves 30% for leisure and 20% for debt and savings.

Before signing any legal documents or accepting any house ownership deals, it’s always wise to consult an independent financial adviser or mortgage broker. You can always rely on their expertise. They will consider the true cost of house ownership and your unique circumstances.