Being house poor does not always mean you are missing mortgage payments or about to lose your home.
You can pay every bill on time and still feel financially trapped because too much of your income is tied up in the house.
The mortgage gets paid. The property taxes get paid. The heat stays on. But there is little left for savings, repairs, groceries, retirement, family expenses or simply enjoying life.
That is the part of homeownership people do not always see when they are focused on getting approved for the biggest mortgage possible.
Years ago, Mrs. CBB and I met a young couple who gave us one of the best real-life lessons about avoiding this situation. Their story has stuck with me ever since.
A $20 Stereo And A Lesson About Money
Mrs. CBB and I found a stereo on Kijiji that looked like a fantastic deal. We normally do not buy many electronics second-hand, but this one was worth checking out.
When we arrived, the seller invited us into the townhouse. The place was spotless, the stereo was still packed neatly in its original box, and it looked almost new.
We paid $20 for something that had originally cost much more.
While we were there, I asked the seller if he was moving. Yes, I am nosy when it comes to money stories, but that is often how I learn the most.
He told us that he and his wife had just bought their first house.
They had lived in the townhouse for years while they finished university, paid down their student loans and saved money. Their rent was affordable, the location worked for them, and instead of rushing to buy a home because everyone around them was doing it, they used that time to get financially prepared.
What impressed me most was that they had been budgeting and saving with the goal of being able to handle the mortgage even if one income disappeared.
He also told me they had friends who bought much larger homes soon after graduating because their incomes suddenly looked good on paper. Some stretched themselves far more than they needed to.
That young couple did the opposite.
They waited.
They saved.
They paid off debt.
They built emergency savings.
Then they bought a home they believed they could comfortably carry.
That 15-minute conversation was a reminder that buying a home is not a race.
What Does House Poor Mean?
House poor generally describes a situation where housing costs take up so much of your income that the rest of your finances become difficult to manage.
You may still look financially successful from the outside. You may own a beautiful house in a desirable neighbourhood and have a good household income.
But if nearly every dollar is already spoken for after the mortgage and household bills are paid, the house may be controlling the budget instead of fitting comfortably inside it.
That is why qualifying for a mortgage and being comfortable with a mortgage are not the same thing.
Mortgage Approval Is Not A Spending Target
The Financial Consumer Agency of Canada says total monthly housing costs generally should not be more than 39% of gross household income, while total debt payments generally should not exceed 44% of gross income. Those calculations are known as the gross debt service and total debt service ratios.
Federally regulated lenders also use a mortgage stress test. Borrowers generally have to qualify using the higher of 5.25% or their negotiated mortgage rate plus 2 percentage points.
Official resource: Financial Consumer Agency of Canada: Preparing to get a mortgage.
Those rules help determine whether a lender may approve you. They do not know every detail of your life, your savings goals, your childcare costs, your health needs, your future plans or how much financial breathing room helps you sleep at night.
If the bank says you qualify for a certain amount, you do not have to spend that amount.
Signs You May Be Becoming House Poor
- You regularly use credit to cover groceries or everyday expenses.
- Your emergency fund is shrinking or nonexistent.
- You cannot save for retirement or other long-term goals.
- A routine home repair would need to go on a credit card or line of credit.
- You are constantly worried about the next mortgage payment or renewal.
- Property taxes, utilities and insurance feel harder to absorb each year.
- You have little room in the budget for an income drop, parental leave or job loss.
- You are delaying necessary home maintenance because there is no money available.
One bad month does not automatically mean you are house poor. The concern is when the squeeze becomes the normal state of the household budget.
Why Homeowners Become House Poor
Buying At The Top Of The Approval Range
This is one of the easiest traps to fall into. A lender tells you the maximum mortgage you can qualify for, and that number slowly becomes the shopping budget.
But there is a difference between maximum approval and comfortable affordability.
Before buying the largest home you can qualify for, look at what the payment does to the rest of your life.
That is also why I recently refreshed my article about the big-house dream versus the financial reality.
Job Loss Or Reduced Income
A mortgage that feels manageable on two full incomes can feel completely different when one income disappears.
Job loss, reduced hours, a career change or an unexpected leave from work can happen quickly. Your housing costs usually do not disappear with the paycheque.
This is one reason Mrs. CBB and I preferred to make major housing decisions conservatively rather than assuming our best income years would continue forever.
Mortgage Renewal At A Higher Payment
Your mortgage payment today may not be your mortgage payment forever.
Interest rates change, mortgages renew and household budgets need enough room to handle changes in borrowing costs.
When you test your budget, do not only ask whether you can afford the payment today. Ask what happens if the payment rises.
No Emergency Savings
Homes need repairs.
Furnaces stop working. Roofs eventually need replacing. Appliances break. Plumbing leaks. Property taxes rise.
If every repair becomes new debt, the house can become more expensive each year even when the mortgage balance is falling.
We have always considered an emergency savings fund an important part of the household budget.
Starting A Family Or Taking Leave
A home may look affordable based on today’s income, but life changes.
Parental leave, childcare, medical costs and other family expenses can change a budget substantially. Thinking about those possibilities before buying gives you more information than looking at the mortgage payment alone.
Consumer Debt On Top Of The Mortgage
A new house can create the urge to buy everything at once: furniture, appliances, window coverings, decor, landscaping and renovations.
If all of that goes onto credit, the mortgage is no longer the only large monthly commitment.
You do not need to furnish every room immediately. We have always been comfortable buying second-hand, waiting for sales or simply living without something until the budget allows for it.
How We Tested Our Budget Before Buying
One strategy that helped Mrs. CBB and me was to budget as if we were already homeowners.
Before buying, we adjusted our monthly budget to include the costs we expected to have as homeowners.
That gave us a chance to see whether the numbers worked before a mortgage contract made those numbers real.
You can do something similar by estimating:
- mortgage payments
- property taxes
- home insurance
- heating and electricity
- water and municipal costs where applicable
- maintenance and repairs
- condo fees if applicable
- transportation changes caused by the new location
CMHC also has a current mortgage affordability calculator that lets you enter household income, down payment, debt and monthly expenses.
How To Reduce The Risk Of Becoming House Poor
- Buy below your maximum if that gives your budget more room.
- Build emergency savings before taking on the mortgage.
- Pay down high-interest consumer debt.
- Test the full homeowner budget before you buy.
- Leave room for mortgage renewals and higher household costs.
- Think about how the budget would look with one income reduced or temporarily gone.
- Avoid financing an entire new lifestyle after moving in.
- Keep tracking your spending after you become a homeowner.
If budgeting is new to you, my A-to-Z Beginner Budgeting Guide is a good place to start.
What If You Are Already House Poor?
Start with the numbers instead of the panic.
Write down your take-home income, housing costs, debt payments, essential expenses and every other regular payment.
Then look at what can realistically change.
- Can discretionary expenses be reduced?
- Can high-interest debt be attacked more aggressively?
- Can you increase income?
- Can you delay non-essential renovations or purchases?
- Should you contact your mortgage lender before payments become a problem?
- Would downsizing or renting eventually create a healthier financial situation?
There is no single answer for every household. The important part is dealing with the problem before missed payments and growing debt make your options smaller.
Homeownership Should Fit Your Life
The young couple we met all those years ago did not impress me because they bought a house.
They impressed me because they were willing to wait until buying a house made sense for them.
They did not seem interested in proving anything to their friends. They wanted a home they could afford, savings behind them and enough room in their budget to deal with real life.
That is still a lesson worth sharing.
A home can be one of the biggest purchases you ever make, but it should not require every dollar you earn just to keep it.
Discussion: Have you ever felt house poor, or did you deliberately buy less house than you qualified for? What helped you make the decision?
Thanks for reading,
Mr. CBB
Actually, being house poor weighs on you mentally when you see the broken stuff every day that you live in the home. It is not peaceful to have to worry about where the money is going to come from when something needs fixing. By living with your means and saving for repairs, then home ownership can be stress-free.
Yes and I’d rather be happy with less than miserable with more that I’d probably have to sell anyways just to make extra cash to pay the bills. Thanks for stopping by ALicia!! Say hi to Glenn for me! MR.CBB
I’m still here and enjoy reading the articles, just don’t get time to comment like I once did 🙁
Great post by the way – we are currently looking at building a new house and are trying to keep our mortgage down as much as possible to make sure we don’t drown in debt. Unfortunately house prices have gone up since the last time we looked, so things are a lot more expensive than we would have liked.
I think many people become house poor because they are trying to keep up with others. That goal “makes” them purchase a house they cannot otherwise afford.
Typically, that is the case. It’s a pity that some people put “stuff” over living the good life even if that means you don’t have the best of the best. We rented a room in a basement for 2 years just to get by. It was the smartest thing we did for our finances when we needed to save. Cheers Brian.. Mr.CBB
That’s an awesome story. I always love to read/hear about and meet people who are smart with their money. And I think like your story goes to show, you can’t necessarily judge a book by it’s cover, or a person by the apartment complex in which they live. Like you said, some people drive slick cars and live in crazy houses, but can barely make ends meet because they’ve stretched themselves too thin. I’d rather be comfortable in a smaller home than poor in a bigger one.
Well exactly. I enjoy learning about finances from all perspectives. We have friends who can barely make the bills, some stretched too thin and others who have no worries at all. I especially enjoy talking to strangers because I find the most unique situations come my way. Thanks for dropping by Ryan.
We were house poor when we first bought our home. We were 20 years old and we had “okay” jobs, but nothing great. We mainly bought our because we thought that we were both going to get better jobs quickly (I was about to graduate from college with two degrees). Luckily, it all worked out and I found a job before I graduated, but I don’t know what we would have done if I didn’t.
Oh wow they’re really mature about their finances and not a lot of people my age are like that. I personally won’t rush to be a homeowner. Some people say mortgage is a good debt, but it’s still debt and best to take when you have resources to pay for it. Thanks for sharing, they’re really inspiring.
What a wise young man! I wish it hadn’t taken me so long to appreciate a lot what he said until I was older.
Sometimes we learn the hard way Amy however it’s important to start thinking about it as soon as we can.
The best advice I ever received: The bank is not your friend. Just because they say you can borrow up to a certain amount does not mean you should.
Enough said.
Exactly!!!
We became house poor due to job loss, not budgeting and having four kids, but the biggest reason was not budgeting.
I’m sure it was a breath of fresh air when he told you his story. I’m actually surprised he was selling his stereo for so little if it was in such good condition. On the other hand, some people are quite reasonable at pricing their clutter, which is great for frugal minded buyers, like yourself.
I have a question for you about the shoe thing. As I know you are from UK, my experience is that people in the UK do not remove their shoes in the UK in someone’s house. Do you find this to be true? In Canada, everyone removes their shoes, but maybe it has something to do with being used to doing so, because we have out boots on for so much of the year and no one would dare walk around in their boots in someone’s house! LOL Of course another thing that I notice is different to Europe is that no one their has screens on their windows. They do not have to worry about the mosquito and fly population like we do here in North America!
No, we had to take our shoes off all the time and same goes at my house in the UK. I’d never let people walk through the house with their shoes on. I think it depends on the family. Even now we don’t let anyone in our house with their shoes on. Why track more mess into the house than you need to. True about mosquitoes… they attacked me from day 1. I get welts if I get bit however now that I’ve been here for almost 7 years they aren’t as big. I take B1 at my docs request.
I have many friends that I can’t even imagine how they are able to pay their mortgage. One of my friends is going through some unforeseen financial issues that she could not have predicted. She is having a hard time even budgeting her mortgage in with her pay being the only income. It is very sad. She had to purchase the biggest house on the block right after she had gotten married. She is having a lot of doubts and a lot of “what ifs.” I try to help her as much as I can, but I think even she knows that she is fighting a losing battle.
That’s a sad reality for some people and their options are limited but there are options.
I was asked a few months ago to talk with a family in our neighborhood who was struggling with their home and finances. They struggled for 5 years with their home barely surviving month to month. They had no wiggle room for anything and ran in problems with their vehicles and then medical issues. We sat down and put it on paper and showed there was no way with their current income to change the situation, plus they had 2 kids entering college. I said what if you left this house and got something cheaper. They loved their home and I said “do you love your house or family more because your family will be happier when your finances are in shape. Your home is just wood and drywall and there is lots of that around.” They started looking and found a house just slightly smaller just a few miles away and it was $70,000 cheaper. They moved and all of a sudden stopped living month to month. The stress from the last 5 years was instantly gone and they were no longer crippled by by their home. It is supposed to be a happy place and not the reason for stress in your life.
Hello Mr. CBB,
I definitely am not house poor. I sold the previous place (which was a three-bedroom, two-bathroom house, about 2300 square feet, that I purchased in June 1998) I owned in July 2004 for just over double what I paid for it. I saved the money I made (which included the profit and the equity buildup from paying down the mortgage) from the sale of that property and invested the money very well. I retired from my previous employer at the beginning of March 2007 and am getting a small monthly pension. I rented from July 2004 to October 2008, when I purchased (from a bank which foreclosed on the previous owner), during the depths of the last recession, my present place, which is a small (849-square-foot) condominium with two bedrooms and two bathrooms. I used a very small portion of the money from the sale of the house for the down payment on the condominium and had a very small mortgage, which I refinanced (from a 30-year loan to a 15-year loan) to a much lower interest rate in August 2009 with another financial institution and which I paid off last year. I set aside my savings, which includes the money remaining, which is substantial, from the sale of the house plus the investment income, the money that was in my former employer’s 457 and 401K plans and that is now in a traditional IRA, and my Roth IRA, for my old age. Back in October 2008, my real estate agent suggested that I purchase a bigger (and, of course, a more expensive) place. I told him “NO”. I told him that I had a strict limit with regard to how much I would spend. Financially, I am in excellent shape. I now am just letting time pass by until I celebrate my 70th birthday, at which time I truly will be financially independent. I will be age 70 in less than 11 1/2 years. Even though I must watch my spending very closely until I reach age 70, I really am enjoying my retirement.
People really need to be careful when they spend their money, especially with a large purchase, such as a house, when debt often is necessary. There is too much of a “keeping up with the Jones” mentality, especially in the United States. My Mom and Dad, may they rest in peace, grew up during “The Great Depression” years of the 1930’s. My parents and I talked about personal finances on a very regular basis, even when I was very young. I learned my lessons well from my parents.
I’m not sure if we are house poor or working poor, or both! My husband and I bought the “best” house on the market at the time that was well within our budget. We had the home inspected and of course everything important was missed. Being first time home buyers, we had little building and construction knowledge. We know better now! Our roof structure was compromised, foundation was not sound, extensive termite damage, leaking roof, hidden rot, terribly old electrical, and a messy plumbing job in our under height basement. To tackle the foundation and termite damage we lifted the house, a major expense which we would never recoup in our repairs. To attempt to recoup our losses we built an addition and lifted the house so we could have a full height basement. The renovation bills have mounted beyond expected (most of the problems I listed weren’t known until it was exposed ie. foundation problems, and roof structure and electrical problems buried in insulation. We have a 2nd mortgage with plans to dump the debt into our increased equity. Risky yes, but the only way to get ahead of this problem as the house was almost worthless before fixing. I’m pregnant and we were expecting this project to be completed about four or five months ago, but this build has quadrupled in size since we started (originally lift house and fix rotting/termite damaged structure), so now I can’t go back to work for a few months (almost due). We are watching every penny, but the bills are getting unmanageable. We have always been very budget and thrifty type people so this stage is going to be short lived I’m sure, if only we survive!
Hi Mr. CBB. I just came across your site. This is a great article that addresses the real issues of biting off more than you can chew when it comes to home ownership. I’m in the Toronto area, and when it comes to home buyer, the only way to describe it is “irrational exuberance”. to quote Alan Greenspan. I’m in the inspection industry and I see how crazy people can get when it comes to buying houses, and taking on so much debt. This problem is exacerbated by agents who egg on their client to buy bigger and more expensive, just because the interest rates are so low. Often many of these people don’t think about how they will deal with those major and minor home repairs and expenses down the road.
Thank you for sharing this! It can be overwhelming trying to manage a mortgage and your article was very helpful.