You can avoid being house poor by following these quick tips!
We in Oakville have been blessed with a very strong housing market. It is predicted that the average home price in Oakville will reach $1,000,000 in 2016. This is great, but also has challenges with regards to affording our mortgages and not being house poor.
Most people start the home buying process by contacting their financial institution to determine what mortgage amount they qualify for. Qualifying for a mortgage is a fairly standardized process in Canada, because all financial institutions typically use federal rules to qualify borrowers for their mortgages. If the borrower’s credit, down payment, income etc are acceptable then their maximum mortgage amount is determined by the Total Debt Service (TDS) and the Gross Debt Service (GDS) ratios.
Although this qualification method is simple and helpful, it does not deal with affordability at all. In most cases the TDS ratio usually qualifies a borrower for more mortgage than what they can afford. This is because the TDS does not consider life circumstances, nor lifestyle at all. It does not take into consideration whether someone is single, married or has children.
Thus, if a borrower purchases a home based on the maximum mortgage amount their financial institution qualifies them, there is a good chance they will be house poor. Our homes are supposed to serve us, not the other way round. The only way to avoid being house poor and secure future wealth is a balanced budget. Doing a budget will determine what you would like to pay every month for a mortgage and that should determine the mortgage and home you purchase.
Here are a few ways to prevent being house poor:
- Take ownership of your finances and educate yourself with regards to home ownership. Know the costs associated with owning a home.
- Complete a balanced budget and determine what you can afford for a mortgage every month.
- Have a financial plan. Avoid the poverty trap by investing into your future financial plans.
- Don’t put all your savings into your down payment. You should have 3 to 6 months in liquid assets for your rainy day fund over and above your mortgage down payment.
- You will need money to spend on the home after closing for maintenance etc.
- Plan for life changing events such as children etc.
- Don’t buy up. Buy within your means; later buy again and rent the existing home out.