House Poor
Posted by Gail | Filed under Home Buying
One of the biggest mistakes I’ve seen people make is to buy a home that’s just too expensive. My rule of thumb is to spend no more that 35% of your net income on housing: mortgage/rent payments, property tax, utilities, insurance and maintenance. But I’ve worked with a lot of people who are up in the 40’s. Man, they are House Poor!
One reason people end up in more home than they can afford is that they leave it to their lender to decide how much mortgage to take out and how much house to buy. Really? You’re leaving it to the guy who is going to make a killing off your decision? Wow! That’s dumb.
Another reason people end up in more home than they can afford is that they’re so anxious about getting into the housing market that they throw all caution to the wind and buy without enough of a downpayment, triggering mortgage insurance premiums on top of their mortgage and adding to their costs. They often don’t have money set aside for closing either, and end up tapping other sources of credit. Again…dumb! Some even tap their credit cards and lines of credit for their downpayments. Once upon a time this wasn’t allowed by lenders but now everyone seems to be looking at their shoes.
Ultimately it all ends in a mortgage meltdown. Folks find themselves struggling to make ends meet and keep their dream roofs over their heads. Their best intentions end up with the worst consequences all because they failed to add up the real costs of buying their home. And since we haven’t seen the impact of rising interest rates (yes, they’re coming) on people’s cash flows yet, this sob-story is about to get a whole lot more sobby.
While a mortgage is “good” debt – you’re building assets, after all – too much mortgage is a fast route to bad debt. Why? Well, when it takes too much of your money to keep that “good” debt in good standing, you’re more likely to turn to your credit cards and lines of credit to make ends meet – never mind have some fun. The result: oodles of debt racked up, or a life given over to sitting in a home and staring at the bare walls.
Want to avoid becoming House Poor?
Start by Knowing The Numbers. All the numbers. Figure out how much mortgage you can comfortably afford to incorporate into your budget and then don’t look at properties that would take you outside your comfort zone. Add a couple of percentage-points to your mortgage to see how you’ll be able to cope with rises in interest rates (particularly important if current rates are very low). Know how much it’ll cost to close and move into your home, and then save the money up so you don’t end up tapping credit and paying huge amounts of interest. Know what it’ll cost to carry the home – things like maintenance, insurance, and utilities – and then build those amounts into your budget so you aren’t shocked when you finally do move in.
Practice, Practice, Practice. Why would you think you can move from renter to home owner (or from small home owner to bigger home owner) without having to adjust your budget? Yet people make the assumption that they’ll find a way to cope. Really? Why not practice living on your new home budget before you do the dirty deed to see just how it’ll feel?
This is a little like the advice I give newly preggers: Learn to live on the income you’ll have while you’re on mat leave while you’re still working and bank the rest. Ditto home buying: figure out what your new budget will be, auto-debit that amount to your savings account (less your current housing costs), and use those savings to build your Closing Costs Account. There now, you’ve killed two birds with one stone: figured out how to live on your new budget, and saved for closing costs.
Don’t Fall In Love. This is, perhaps, the biggest mistake people make when shopping for a home. They see something, fall in love, and have to have it at whatever costs. This is the root of the bidding war phenomenon. Dumb! A house may be a great deal at $350,000. But at $500,000 you’re a sucker! Do you really think there are no other houses anywhere? Lord love a duck.
Falling in love leads people to do all sorts of stupid things. They buy the surface beauty (homes are regularly “styled” to do just this) and fail to look at the structure of the home. They waive home inspection clauses. Dumb. Suppose all that new paint is hiding mold, water damage or a cracked foundation, wouldn’t you want to know?
Buying a home should bring joy and excitement. It should not be a twitchy response to a sales promotion or person, or a do-or-die event. While it’s normal to feel butterflies — it is after all a life event — if you can’t sleep at night because you’re not sure how you’re going to pay for it all, you haven’t done your homework. And if you’re giddily stepping into a major financial commitment without doing all your homework, then don’t be surprised when you wake up in a cold sweat.
December 1, 2009 at 6:19 am
[...] is the original post: House Poor Posted in Auto Insurance | Tags: carry-the-home, current, current-housing, figure-out, [...]
December 1, 2009 at 7:34 am
This is one fo the major reasons that we haven’t bought a house yet. We need to save up a downpayment however that has to wait till we are out of debt. Also the housing market as it is will be tough to get a house that will come in under budget especially when you consider the saving that has to happen for repair costs. For now I’m happy renting, our housing costs are well under the 35% and we don’t have to worry about repair costs.
Nice article today Gail.
regards,
Jason
December 1, 2009 at 8:20 am
Great article.
I am still not convinced a home is “good debt”, based on my latest findings such as the homes being made out of chipboard coupled with shoddy workmanship that causes EXTRA maintenance over the years.
Or that putting your money into an asset like a home is really just another investment. It can go up or down, like the stock market, and as we’ve seen — it doesn’t always go up.
But if I were to purchase a home (more likely a condo, or rent forever), I’d never purchase anything too expensive.
The mortgage is just too big of a debt to be reckless with.
December 1, 2009 at 8:20 am
Lord love a duck, haha I love that saying.
I think this is so true. A few of my friends have started to purchase houses and are in over their heads already. They didn’t do their research. Renting is not a waste of money. Renting is a great way to save up for the house you want. I would love to move into a house within the next 5 years, but a lot of things will depend on that, I need to do my research and have a lot of savings in place first. Nice post
December 1, 2009 at 8:51 am
My husband and I purchased our house 7 years ago for 210K with a 35K down payment. We knew we could afford it and not be house poor (although we could have afforded a lot more). Good investment considering its worth 350K today. Fast forward to today and we have added 2 kids into the mix. Although some days I find my house quite small and wish we could buy a much bigger home with more space, this would mean a larger mortgage payments, taxes, heat and hydro. Most of our friends live in big beautiful home but I am willing to bet that they are not 5 year away as we are to have the house fully paid for and that is what keeps us motivated to enjoy what we have. We are debt free, take vacations, have plenty of savings.
Lets remember that regardless how big your house is, anyone can make it into a great home.
Thanks for the post Gail.
December 1, 2009 at 9:04 am
We were pre-approved for a lot more than we spent. But, we spent what we were comfortable with. After all, we didn’t want to have to continue to be on-the-road 12 out of 14 days to pay for it. What’s the point of buying a house if you’re going to be working so hard to pay for it that you never see it ?
December 1, 2009 at 9:14 am
Ten years ago was when we bought our house, and we did have a house inspection done. But, be wary. Even with an inspection, they can miss things! After closing the deal, and getting the keys, we came to the house to find water at the base of a basement wall. WHAT!!! I was so ticked off and mad. I went outside to where there were wooden steps at the same spot on the wall that the water was coming in. The steps were leaning towards the house, and therefore water was flowing towards the house when it rained. I was so mad, I literally ripped the steps and railing off the wall, kicking it, and dismantling it. My husband was wondering what the heck was happening! After the steps were off we were able to repair the water problem, but my heart was pounding after that. I was mad at buying the house (because I thought at that point we had bought a money pit), and I was scared at all the other problems we might find – even though we had had an inspection. Thankfully, that was the only BIG problem, and we are still here and happy now with our house. It is a very scary thought of spending that much money on something, and then realizing that it is yours, and you have to maintain it! It can add up fast. Even if it is a brand new house, crap happens. I see those big homes and think how nice they are – but then I realize that I don’t know the full story. You never know what they may be hiding!! I’m glad we bought a house we could afford and can keep our heads above water (pun intended!)
December 1, 2009 at 9:28 am
Then there are the serial consolidator/remortgager people.
I know a couple who were able (after getting their home reappraised to today’s value) to consolidate and remortgage for another 30 yrs and they are at retirement age!!!
I wouldn’t be able to sleep at night.
December 1, 2009 at 9:30 am
Brenda, I laughed at the mental picture of a furious new homeowner ripping apart her stairs!! I am glad that you didn’t find any further problems, but at least your husband knew you could take care of business!!
December 1, 2009 at 9:31 am
How long do you stay in your house? I now have the joy of watching my near adult kids start to move out, and now have more space, and now I wonder when we might move to a smaller house, or whether we simply pay this house off, and remodel a little (and figure out how to keep our kids from Boomeranging back into the house)
December 1, 2009 at 9:31 am
I am so happy to find someone else who says “lord love a duck”
Our house in t i n y. seriously. comparatively, so is our mortgage. Yet in a year barely $2000 has come off the principal of the loan. I can’t imagine how scarily slow that moves on a quarter million house or larger.
December 1, 2009 at 9:39 am
Lets see you buy a cheap house for 200,000
needs a lot of work $ thousands on repairs
a 25 mortgage to buy it costs you about that initial amount
so you sell it for a “profit”?
December 1, 2009 at 9:46 am
Ah yes. This is something I’ve watched my in-laws go through – for their whole lives. And because of a stubborn streak and a want for the property they’ve lived on their whole lives they just won’t find a more affordable option.
This is something my partner and I have discussed time and time again, and once we have cleaned out debts up, will be saving for the 25% we both want down, to ensure we can handle payments and a house within budget and make sure we have control over our choices.
it’ll take a while – and for now I’m happy to rent a nice place that we can afford and still get out of debt and do things the right way. The Gail Way!!
December 1, 2009 at 9:48 am
I never want to be house poor. I work full time, have many hobbies, and sometimes, I swear, our house is just a place I keep stuff and sleep (I’m not complaining, I love my life). The point is, I don’t need a huge house to pay for, because I’m rarely in it! I would much prefer to be able to afford to do the stuff I love to do (hobbies, travel, socializing) than spend all my money supporting my home. Our house has lots of room for the two of us. Lots of our friends have much bigger/newer/fancier homes, but it’s just not for me. DH sometimes longs for the bigger/newer/fancier, as he is in charge of most of the home repairs, but then he saw our friends move into a brand new house and have repair problems up the wazoo! Go figure. As always, Gail gives great advice-we all just need to learn to follow it
December 1, 2009 at 9:53 am
@ Brenda : We bought a brand new house and just months after the 2-year new home warranty was up, a freak rainstorm left us with water in our basement. Fortunately we bought from a very reputable builder, and even though the damage normally wouldn’t have been covered anymore, they came through and fixed everything ! They even went above and beyond. Lots of homes in our neighbourhood had water problems, and the other builder wasn’t standing behind their reputation. The Lord must’ve been lovin’ these two ducks.
December 1, 2009 at 9:58 am
We bought our house almost six years ago- all 974 square feet of it. Even this house would cost $100,000 more if we were to buy today- I don’t know how people DON’T spend too much today. As well this house needs new windows, exterior insulation and some inside renos all of which we are saving for. If we had bought in today’s market for $255 000 and the house still needed the repairs- I don’t know how we would have managed. I can definitely say that my working part-time to be with the kids would not have been a feasible option. As it is- we can survive on one income and are paying the mortgage and the car loan down at an accelerated pace so we can get to those needed repairs-
December 1, 2009 at 10:23 am
I disagree that falling in love with a house is necessarily the root of a bidding war. It may be, but I also think a leading cause is also underpricing the house to begin with, and the relative scarcity of supply in the nicer areas. I’m talking about Toronto here, not Prince Edward County where I think a bidding war would be insane. But to find a nice house in toronto that’s not falling apart or in a crimefest neighbourhood is not that easy and there are many others looking too. That said I think people should always be prepared to ‘lose’ a bidding war, it’s not win at all costs either. But simply paying ‘above asking’ doesn’t mean you have lousy judgement.
Gail I think you should also look at the flipside of paying too little for a house (what?). What I mean by that is there are some who buy a cheaper house out in the distant suburbs (Oshawa) and then commute 2 hours a day each way. I think that’s crazy and gas is an expense that isn’t capitalized, unlike paying off your mortgage. The cost on the relationship is I think the real toll. Don’t underestimate the relief that a 20 minute commute provides.
December 1, 2009 at 10:27 am
While saving up to buy a home, I lost my job. No second income in my family, so it’s all on me. Because I don’t have a huge mortgage (I’m still renting) I can live on the unemployment stipend I’ll receive. And if I remain unemployed for an extended period, I can move to a less expensive place without much trauma and instantly reduce my monthly housing cost if needed. I can also relocate on a dime if an employment opportunity takes me elsewhere. Would I rather own my own home? You betcha. But not if it makes me financially fragile. I love sleeping at night!
December 1, 2009 at 10:48 am
I”ve been a renter forever, but I would like to buy my own place at some point in time. I agree with Jason – have to save up enough down payment AND eliminate my current debt before I even think about buying. I don’t want to have a house but have no money left to do anything else…I can wait!
December 1, 2009 at 11:23 am
Here are some more rules to ponder…
As a rule of thumb, I use 25% of net income for mortgage payment.
Also, base your housing payment on only 1 income…not two.
December 1, 2009 at 11:33 am
I rent too, and in today’s bloated, and I do mean bloated housing market, I will keep living in my maintenance free apt until housing prices reset. When a 900 square foot home in my area is selling for $175K, there is a problem, especially when it’s 45+ yrs old. New condos going up 800 sq ft, starting at $289,900. Nah! Just because you can look at the lake? I can go to the lake for free!
December 1, 2009 at 11:34 am
I use to hate the idea of renting, and now I am thinking its a better idea for my budget. With the cost of homes in my area (north Toronto) I can’t afford anything or see how I ever will be able to afford a mortgage in the $275,000 range.
I don’t want to be house poor nor do I want to miss out on life experiences beacuse I have a mortgage eating up my paycheque. I want to travel and renting will allow me to do that. I never have to worry about the maintenance and unexpected repair costs.
Sure, I am aware I am missing out on equity and investment, but I will gladly exchange that for a trips to the south and Europe. You can’t take your house with you when you die, but you can take the memories and I would rather have memories of the Eiffle towner than the four walls of my living room.
To each his/her own, but I am satisfied with renting.
December 1, 2009 at 11:37 am
May I also suggest to you that you NEVER tell a realtor what you have for your downpayment! They will insist on showing you homes way over your budget. We learned that the hard way 22 years ago. They want the biggest commission they can get so want to sell you the most expensive house they can. After going through several realtors with the same response we found our own home. We had continued saving for the two years we were looking for a home in our price range (20 months with realtors). It’s a small home and at times we wished it were bigger but our boys are a few years from moving out and we won’t have to downsize. Also utility costs were always considerably lower than a larger home not to mention property taxes and maintenance.
Tanya
December 1, 2009 at 11:41 am
My hubby and I are home-bodies. We LOVE being home and have very little desire to go out, travel, buying expensive things, etc… our home IS our vacation spot and we love that we love our home. Having said that, we did buy a brand new larger home (we also have 4 kids so need a bit more space than just a couple) and as a result, our “housing costs” equal exactly 35% of our net income. Inspite of that, I am still able to work only 8 days a month while staying home most days to raise our young family. We have a very modest daycare cost of $180 per month in order to facilitate my working schedule. Now, if I returned to work full time and plopped the kids into daycare every day our housing costs would probably equal 30%, but what about the increased daycare costs??? What about the time spent away from the children? What about not having the time or energy to help them adequately with homework? Or spending time getting to know their friends and friends’ families? What about missing all the school assemblies and class presentations? What about not helping in my little one’s kindergarten class once a week? These are the things that make my life full and satisfying and help me to feel connected to my loved ones. I wouldn’t want to trade all this for a bigger house. I’m glad we chose to keep our housing costs manageable so I could work only part time while my kids are still little!
December 1, 2009 at 11:47 am
Oh dear, this hits close to home.
Hubby bought a house before I came along. he did because he had gotten a stable, well-paying job, and figured that at his age, that’s what people were supposed to do when they got the stable, well-paying job. It’s the next logical step! [cue my head pounding on the desk when I heard the story later on]
He didn’t have a substantial downpayment, so his parents stepped in to help out, not wanting him to get saddled with the mortgage insurance.
He found a house he liked. Nice and 110 years old (he wanted an old house- they’re so classic and charming!) It was a bit out of his price range, but he put in an offer. Offer refused. Too low. So he tried again. He got the house. All in the same day, because at the time, houses in our city were selling in a few hours or less.
He crunched the numbers. “Wow, that’s going to be tight”, he thought. Well, I have said stable, well-paying job. It’ll be tight for a few years, but my salary’s going to go up as well, so it’ll get easier. He’s paying about 40-45% of his income on the house.
Cue 3 years later. His boss is making his life a living nightmare. He’s desperate to leave, but the recession is going full force and few people are hiring. His boss strongly insinuates that he’ll be fired if he’s not gone before the next performance review. In the meantime, said 110 year old house requires a TON of maintenance just to keep it standing, let alone take care of big items like the roof. Also in the meantime, city council approves property tax hikes of 5% and 8%.
He gets another job- in Toronto. Requires a medium-sized pay cut though. City council looks ready to approve a 13% property tax increase- bring the total to $6000 a year. Add high maintenance fees and the prospect of having to replace the roof in 2 years. Suddenly the house is costing nearly $3000 a month, out of a salary of $4000 a month.
That’s right folks, 75% of his take home pay. I cried.
And we sold. I have never been so glad we did.
December 1, 2009 at 11:48 am
Geoff,
I agree with you. Part of why our house is pricey relative to the square footage is that we live close-in to Calgary; a 15 minute drive is a LONG drive anywhere for us! Our housing costs come in just over (37%) Gail’s recommended amount, including maintenance. But our transportation costs are way under (7%, not 15%), and this is with running 2 vehicles! Why? Because our daily drives are so short. Between both vehicles, we spend $100-150 on gas total…PER MONTH, not per week.
So look—to each their own. But I do think it valuable to consider your overall lifestyle costs in both time and money. Yes, a new house in the newest burb ringing the city is far less money–but some of your other costs (gas, vehicle maintenance) and your time costs are far higher. I for one am not convinced that living further out always makes the most sense, financial or otherwise.
December 1, 2009 at 11:49 am
I’ll admit to being guilty of a high mortgage. I get rental income from another home that helps cover the mortgage of the place that I live in so its never been a problem so far. I’m also single so I’ve only ever had to look after me. That being said- the trouble with my mortgage (about 50 percent of my takehome if I don’t count rental income or bonuses) is that it makes an emergency fund very hard to build up. So while I’m not as worried about losing my job, I am having to save a lot longer for the EF which means reducing spending.
Lesson learned. I’ve got to bring that mortgage down.
December 1, 2009 at 12:05 pm
We bought our house 10 years ago brand new. We are 5.5 years away from paying off the mortgage and excited about being mortgage free. However, we were sure house poor when we started! We jumped into home ownership because of a lump sum of money that we received that we used for the downpayment. Home ownership is definately more expensive than renting! We made it through and now are happy we did it but we sure didn’t think it through.
The other thing that I would highly reccommend is Gail’s home maintenance fund. We figured that we had a new house that we didn’t need any money put aside for maintenance. Well, now that our house is 10 years old things are starting to go and we only starting putting money away a year ago (Thanks Gail!). If we would have put away even $100 a month we would have had $12K plus interest to use right now.
And I have been using Lord love a duck too!!! Great post Gail!
December 1, 2009 at 12:09 pm
What is a high mortgage these days? Its not just about 35% of your salary is it? Becauise if it is 35% of your salary for 40 years that is a whole lot different than 35% for 15 or 25 years. I wonder how people are doing with their mortgages, when do you expect to be mortgage free?
December 1, 2009 at 12:10 pm
We bought our small house(900sq ft) 10 years ago. We spent less than we were approved for. This was before the house prices sky rocketed. We spend about 21% on housing costs, including property tax. We planned on a mortgage that could be paid if we only had one income coming in. Which has proved a great move as we have had to rely only on one income a few times
December 1, 2009 at 12:13 pm
Have ya ever shook your head at how many people use fear and stupidity when making financial decisions? We all know that you should buy low and sell high right? Buy your house when the market is down – hmmm – how many people actually did this? How many people saw the recent downturn in housing prices as a great time to buy and actually bought? Most actually waited on the sidelines for the turn around to start and then bought. But the turn around was sudden and house prices are up again. When you allow yourself to get into bidding wars you are buying when the market is high and you are the one inflating the market. D U M B! When you wait for the turn around in prices you have missed the opportunity to buy low. D U M B! When you buy because you are afraid that you are going to miss out on something you are buying in fear. D U M B! When you buy without subjects like a home inspection cause you are afraid your offer won’t be accepted – again, D U M B! When you don’t complete your research on builders or neighbourhoods or renovations (you know, going to city hall to see whether permits were issued for that wonderful new kitchen or addition) D U M B!
Now, why are we like this? I wonder if it has something to do with the fact that for many, we are buying a house for one reason only – to make money. We know that we are going to sell again in 2-3 years and we are only focused on the equity that we know (err, hope) that we will have then. We don’t stop to think of closing costs, taxes, maintenance, utilities, repairs…..we are only focused on making $50, $60 or $100,000 a year in equity. If only it were that easy!
But what else can we do? Interest rates are so low we can’t make money by putting it in a bank – we don’t want to invest in the stock market as we haven’t recovered from 2008 yet, Savings Bonds – yeah right – face it, we can’t lose by buying a house – ahh, to dream the impossible dream
December 1, 2009 at 12:15 pm
If we didn’t have any children, we would still be renting and pocketing the extra money. It would be a lot cheaper and a lot less responsibility. A lot less space, but we don’t personally need the space.
That being said, we are not house poor.
The cost of interest for a 25 mortgage is almost double the price of the house. So I see a house for $200,000 as costing $400,000. So we are trying to pay off the mortgage. Otherwise, there is no advantage to “owning” the house. The bank owns it until you pay if off in full!
House value increase – interest paid – maitenance/renovation cost= actual value increase.
Usually this is negative, so we’re not really making anything by buying a house. It is a place to live, not an investment.
December 1, 2009 at 12:19 pm
When my husband and I got married 14 years ago, we bought a small downtown condo with 5% down (yes, CMHC) for $167,000. We chose bi-weekly payments and took advantage of our prepayment clause (15%) whenever we could. We were both working and stayed there for 4 years until we had our baby. Then we sold the condo for $220,000 and bought a townhome just north of the city for $233,000, closer to my husband’s work because the area was cheaper and I wanted to stay home. We stayed there for 7 years and then sold at the height of the market for $370,000 and downsized (there’s only the three of us) to a 2 bedroom 1400 square foot condo which we bought for $227,000. We paid off our mortgage, renovated the condo and still pocketed a very nice amount of money.
When we look at our friends who moved from too-expensive-to-begin-with-starter homes to bigger homes to 4000-5000 ft “family homes”, we’re not in the least bit envious. Being mortgage-free before 40 is wonderful and our extra money goes to something we all love to do together: travel.
December 1, 2009 at 12:24 pm
Jane,
We’ve always put a bit extra each year against the principal, and will be mortgage free in another 6 years (so 15 years total since becoming home owners.). It is amazing how much even small amounts each year add up.
December 1, 2009 at 12:34 pm
Good article. Commonsense. I also see Gail used part of one my recent comments on her site about my not falling in love with things and how sales people thrive on this. Hmmm…I will be more careful about what I post in the future. I have found this happens on other sites as well. Thanks for the compliment Gail, and your wecome for the idea.
December 1, 2009 at 12:38 pm
As a side note, the other part of my comment posted on an earlier site about not falling in love with things includes…cars and other ‘THING’. Some things have self given, sentimental attachment to them but even those can only be enjoyed while your here. Love people, not things.
December 1, 2009 at 12:45 pm
Geez Jo, I’m sure that if your idea came from you that Gail would credit you. Personally I think it’s hardly a new idea but good common (keyword: common) sense that you should try to avoid falling in love with anything you want to buy. I’m also not sure why you’re going to be more careful with what you post, you insinuate an ominous move on Gail’s part when it’s not like Gail charges admission to her blog. Chillax dude, chill-axe.
@ Risa – Love Calgary. Love that someone else gets that traffic is a nightmare in a big city – and having been to Calgary I’ll try to avoid being all Mr. Toronto and saying no other Canadian city has traffic like Toronto (but no other city has traffic like Toronto… oh shut up Vancouver)
15 minutes can literally equal 15 feet on some roads at some parts of the day.
December 1, 2009 at 12:59 pm
I’m very fortunate that my husband purchased our home when he did. This was before I met him. It’s a small 1500 sq ft. home but fits our family perfectly. Plus, I really hate cleaning but can’t stand dirt (HA!) so a smaller house is better. We spend only 25% of our take-home pay on our housing,utilities etc. and will have it paid off in less than ten years. I feel very blessed indeed
All of this has enabled us to slowly renovate our home, (paid for in cash) build a good emergency fund (thank you TFSA) and fund RESP’s and RRSP’s. I wouldn’t dream of moving to a bigger house and pay more. I can’t wait to be mortgage free!!
December 1, 2009 at 1:01 pm
My FH and I bought our house in December 2008. When we went to the bank a couple months prior to see what we could get approved for I was amazed! I had worked the number prior to our bank appointment and felt like we would be approved for $300K. Well … we were approved for 430K! My FH was all excited because house here in Edmonton houses are VERY pricey and we didn’t think that we could get into anything in decent shape or in a decent neighborhood. So I went home crunched the numbers again and I couldn’t figure out how our bank thought we could afford a $430K mortgage. So I called my banker and asked her. O my gosh I couldn’t believe what she told me. We qualified for a 430K mortgage because our downpayment was 5% of that. I told her after doing a monthly budget with a mortgage, property taxes, etc there was no way we could afford that. So we bought a house for $265,000 out in Leduc which is ten minutes from Edmonton with much more realistic house prices.
I am so thankful we didn’t “buy into” the number our bank gave us. We would really be struggling right now.
December 1, 2009 at 1:05 pm
Where we live (one of the cities surrounding Vancouver), we could never get into a big enough house that was only 35% of our income. Houses in our city START at $450K and that’s for the major fixer-uppers. For this reason and the reasons Gail listed above, we will most likely never buy. And it’s only just recently that I’ve become okay with that. We rent an incredible house with a pool, in our desired neighbourhood and we have the peace of mind that if one of us loses employment we can easily move into something smaller and cheaper.
December 1, 2009 at 1:05 pm
@geoff: Boy oh boy you sure brought up a great point. Houses outside your main area (city, town etc) are always less expensive and usually you get more house for your money but this can be a real trap.
When we were transferred to Ottawa from a much smaller city we arrived with no chance of getting into the housing market inside the city limits or even inside the close suburbs. Or so we thought in our innocence. So we bought a lovely piece of land 45 minutes outside the border of the last subdivision and built a lovely little house.
We loved living in the country and the property taxes were only 2/3 of those closer to the city so we thought we were well ahead. NOT. In the 9 years we lived there we spent a fortune on gas, tires, insurance and car repair and maintenance. We wore out our old car and had to buy a new one before we had any money to do so and then when I changed jobs we had to lease a second car. Ended up having to sell one car because we could not afford both so then we played taxi to each other – sometimes making 4 trips in and out of the city in a day. I also started work an hour earlier than the Hubster and finished 2 hours earlier and having to sit around and wait led to shopping out of boredom which of course led to more debt. We traveled 2-4 hours a day (the car became our time capsule) in all weather conditions and we never got this time back.
When we were transferred again our house had only increased in value by about 10% whereas the houses close to the city had jumped about 40%. If we add up the transportation costs and “paid” ourselves for the time spent traveling (where we could have worked a second job or overtime instead of sitting in a car) we could easily have bought a house in the suburbs. It would have cost more up front but we wouldn’t have been nickled and dimed and we certainly would have had a much smaller carbon footprint and a lot more time to do other things than just drive.
December 1, 2009 at 1:12 pm
Jane,
I consider our mortgage high (just over $200,000 still owing), but our “housing costs” (mortgage, taxes, $100 towards home maintenance and $350 for utilities per month) equal 35% of our net income. Our amortization when we bought was 20 years and we’ve been here for 3 years now so will have the house paid off in 17 years, hopefully sooner. We can’t budget any more money towards mortgage payments right now, but plan to do that once our LOC is paid off (in 6 months) and we have at least one month’s worth of net income saved up in our emergency fund (in 2 years – boy it grows slowly!!!). In the meantime, we’ll pay off our mortgage as it currently is, and top off our RRSP’s, RESP’s and Emergency funds. In a couple of years, when we have our emergency fund while established, we can divert 100-200 per month towards our mortgage to bring down our amortization period to possibly a total of 15 years instead of 20. That’s the plan!
December 1, 2009 at 1:36 pm
@Geoff…you seem to have read an intent into my comment that was not there. I was making an observation. I know there are many concepts Gail and others when giving advice. The same could be said for her advice to live on the budget it would cost you if you already were on mat leave or owned the house you want and create down payment or nest egg in the process…I first heard a few years ago on a U.S. program. I made the observation because her use of the belief I mentioned came so close to my using it in a post. Ive noticed this before in other blogs, hence my comment. Thanks for the advice and laugh.
December 1, 2009 at 2:05 pm
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December 1, 2009 at 2:06 pm
I have to say, I’m a little puzzled by people’s pride at how little they own, and how frugal they must be to have just that. It’s a bunch of penny-wise pound-foolish folk here it seems to me.
A house worth 6-figures is a large investment to make, yes, but one worth saving for and one worth having. Real Estate is an asset, something you can sell when you are older. Buy in a sensible location, and it’s an asset that can add a whole lot of value.
Sure, a mortgage might cost more than renting the same space, but every dollar you put into that mortgage, every dollar you put into a renovation or repair, is a dollar you can put back in your pocket some day. “Memories of the Eiffel Tower” aren’t going to keep you warm or well fed when you’re 90 something.
And every dollar you pay in rent is busy lining your landlord’s pocket. More importantly, having a major asset to borrow against is a way to be able to live the life you want! Start your own business, get a cottage… all the big expensive things in life people work towards: you need an asset to borrow against.
I don’t care how much you’re sticking by the jar system to manage your life… unless you’re investing in stocks and bonds to build up an safety-net of assets for yourself when you are beyond working… penny-wise and pound-foolish.
December 1, 2009 at 2:07 pm
I am seriously technologically challenged so this lovely new site has been a trip. I cannot for the life of me figure out how to find older blogs. There are always 5 up on the blog page but I – for instance – cannot figure out how to find the blogs that were posted earlier than Nov 24th. I see that there is a section for categories but what do you do if you don’t know the category under which the blog was posted or even remember the title? Is there an archive where the blogs are listed by date and title somewhere? Any help would be appreciated. Thanks.
December 1, 2009 at 2:12 pm
Mrs T – funny I consider your mortgage tiny. My wife and have a much larger mortgage (doesn’t start with a 4 now, but it did just a year ago) and bought in 2007 (her first purchase, my second). We took a 25 year amortization and bulked up payments to make it a 19 year, but I’d like to bulk up again and pay it off in 10 more (so 12 total). That may be a bit aggressive but my main rule is that we don’t carry any consumer debt, and have savings for our son’s education and our retirement, but anything left over goes into the house or emergency fund.
@ Jo – I re-read your comments and haven’t changed my opinion of what you wrote, but like the late great Patrick Swayze said, opinions vary.
December 1, 2009 at 2:14 pm
@Maureen…if you click on the link at the top for Blogs and look down on the right side of the page you will see a link for The Best of Blogs. This is the only place I could find for archived blogs to find one from about a month ago. Many sites with blogs have a link to a full list of archived blogs and articles. Good luck.
December 1, 2009 at 2:14 pm
Yes and if you want to buy in the country and have to maintain your own well pump and associated equipment plus a septic tank with its trimmmings including tile bed system then look out or shall i say investigate carefullly.
Lots of people have bought into these “getaways” to find out the real costs.
December 1, 2009 at 2:20 pm
jen; that is an impressive story! Wouldn’t it be a different economic situation if everyone had such sense with their living spaces?!
PJ; It sounds like keeping yourself “fluid” was a great idea for you. Good thing you were saving up for the decent down payment! There have been times when I felt saddled to our house because we own it. The house itself is nice enough and affordable, but when rotten neighbours move in next door its hard to be happy. We had a terrible neighbour doing illegal things right next door, and we wanted to move SO BAD, our cozy home seemed like a trap at that point. THANKFULLY he was eventually busted (before the house caught on fire) and the place was rennovated and sold to a nice couple… but the warning remained that we bought more than just a house, we bought a commitment to the neighbourhood for better or worse, and getting away from that CAN be hard!
Like so many people posting here, we bought with a budget that WE were comfortable with. The banks said we qualified for WAY more than that, but we knew that we would want to have another baby, so we made our own maximum based on just hubby’s income. And sure enough a year later baby #2 came along and money was stretched as tight as a guitar string for a while! But we were OK because of that forethought.
December 1, 2009 at 2:23 pm
@ Richard – I get what your’e saying and have commented on this blog about not apologizing for the fact that I like nice things and can afford them, but your post on real estate is way off the mark and reads like realtor-speak.
“Every dollar you put into the mortgage, repair, etc is a dollar you can put back in your pocket some day.” Categorically untrue. More accurate: “is a dollar you MAY be able to put back in your pocket some day.” 25% of all home owners in the US now have mortgages that EXCEED the value of their houses. They will not likely get any of the money the put in. For a more close to home examination, look at 1989 real estate prices in Canada, it took 10 years before homes appreciated in values meanwhile interest rates were relatively high. Real estate goes up over the long term, not the short term. Or for renovations: often putting in a pool results in negative value, as does overimproving a house – in a neighbourhood of $400,000 homes, the guy who buys one for $350,000 and puts in $200,000 is not going to sell it for a straight $550,000; he will lose money. Neighbourhoods have price ceilings.
And like you say about rent lining a landlord’s pocket, you could say that every dollar you pay in interest is lining your bankers pocket, there’s lots of ways to look at things. But using your house as a bank machine? Good lord that’s terrible advice, I don’t even know where to begin with that. That only works if the house appreciates in value enough to cover the risks of leverage; and if it doesn’t or (gasp) decreases in value – see the U.S. – you could be royally in trouble. If people accept the risks and do it, that’s one thing but to just uncategorically say these comments is not right. There’s lots of risks involved.
December 1, 2009 at 2:28 pm
@ Richard
Not everyone wants those big expensive things you’re talking about. And while the year-long trip around the world I took with my child and husband a year ago may not keep me warm when I’m 90, it will likely go a long way to my having developed the kind of relationship with my daughter where she will want to be around me when I’m 90 /and/ provide me with wonderful memories of a life fully lived.
And you don’t necessarily have to be insanely frugal to have these things. You simply need to define priorities and make wise choices.
I worked in a new home real estate office for several years and saw hundreds of couples and families put more thought into where they would have lunch after they were done than into the home they were purchasing.
In our case, our $227,000 condo was purchased in a urban neighbourhood just off Yonge north of Toronto which is being “revitalized”. The three buildings just being finished around us are selling for $600,000 plus a unit and well over $850,000 plus for our size unit. New buyers are starting to look at our buildings, calculate the cost of renovating and decide that old might work after all. In the not-quite three years we’ve been here, our condo has appreciated by roughly $75,000 and I expect it will continue to do so.
We travel yearly, my husband has a great pension plan, we have RRSPs and RESPs, we eat out weekly, go to the movies, etc. I stay home, work on my writing (I’m not yet published but I hope to be one day) and am there for our daughter before and after school.
We use our credit cards but we pay them off monthly, track every cent by entering our receipts into a spreadsheet, etc.
We don’t exactly feel cheated. We have all the things that matter to us and since we intend to keep living the same standard of life once we retire, we’re a-ok with exactly where our finances have us. The only thing we’re missing out on is “stuff” and that’s a conscious decision.
December 1, 2009 at 2:38 pm
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December 1, 2009 at 2:52 pm
[...] Originally posted here: House Poor « gailvazoxlade.com [...]
December 1, 2009 at 3:40 pm
@Richard – Shh! As a landlord, the more renters, the better, I say.
Anyway, can we put some caveats with that 35% rule-of-thumb? It’s too general. For instance, my mortgage payment alone is well above that, but I don’t feel pinched because I pull in six figures per annum.
December 1, 2009 at 3:47 pm
The Calgary Herald has big home section every Saturday, and often stories about young people buying their first homes.
I am gobsmacked at the homes that some of 20-somethings are buying….house prices in Calgary are very high (supposedly the “average” home is in the $400K range) and yet there they are, proud as punch to have bought their first home because after all “owning a home is the same as renting” and “why throw our money away on rent”. Every time I read these stories I cry for Gail to come and dish out some of that good-old common sense!
One recent story had a very young couple who had just purchased what I believe was a house (as opposed to a condo) in a new development. Read “far away from everything”, at least $350K. Anyway, I think the gal was about 22 & a dental assistant, the young man was about the same age & listed as a full-time student. Now, I don’t know any dental assistants but I am positive that a 22-year-old one does not make a huge amount of money. All I could see in that story was the doom that is surely down the road for those young folks. They need a Gail-size twack on the head!
I have a huge problem with the media glorifying this stupidity and making it seem like this is the right thing to do. When I was in my early 20’s (I’m now 45), none of my friends owned their own homes, we all rented, even when the kids started coming. I don’t recall anyone who bought their first home before the age of 30. Times have sure changed!
December 1, 2009 at 3:57 pm
@Jo – thanks for the directions. I looked at best of blogs and it does list some great blogs but not all so I guess there is no link to a full archive unless you know the category. On the old site I never had a problem just scrolling down until I found the blog in question – even if it was weeks old and this was useful since I often want to reply to a specific post but get delayed. I hope this new site will add an archive.
@John: How could I have possibly forgotten to mention the well, pump, septic tank, septic field and sump pumps! The banes of our existence and another expense of country living that we were prepared to pay for when considering the mortgage but of course did not consider the maintenance that would be required which increased our overall yearly expenses. We were lucky never to have major septic field problems- ha! just having to dig up the lawn and fence and re-do it before we could sell! – and we had to replace the well pump twice in 9 years. There is also the question of insurance. The further away you live from fire protection services the more you pay. I love country living but will only go back once we have retired and don’t have to go anywhere everyday.
@Geoff: Toronto, Vancouver, Ottawa and Montreal traffic are all terrible. I actually refuse to drive in Toronto or Vancouver anymore. Don’t have the nerves for when it is moving or the patience for when it isn’t. Kelowna is also awful if you live on the west side since there is only one bridge and only one main artery (and of course the least expensive housing is on the west side). Nothing like getting stuck on a lift span bridge that is stuck in the up position in 39 degree heat and having to pee. Thank God for RV’s and friendly Saskatchewanians! I believe that Gails’ 35% for housing is the sensible way to go (and we are doing this now so for the first time are not house poor) but….if we worked in a big city we would get rid of the car and go up to 45% or more for housing in order to buy in the core and avoid all the traveling hassle. We live in a northern city where a traffic jam is considered to be 2 cars trying to make a left turn and having to wait for 3 cars to pass.
December 1, 2009 at 4:38 pm
I thought I’d put in a few good words for those responsible homeowners out there that paid a reasonable price for their house and can afford those payments. Most of us worked hard to achieve that dream and can afford it!
It’s a personal decision to rent or buy a house. I do know that from living in a big city, there are a lot of life-long renters that are living the “lifestyle” and enjoy dining out, going to concerts, spending a lot of money. A lot of those renters want to buy a house but can’t seem to put aside the money to do.
A lot of homeowners are forced to save money for property tax, house maintenance, etc. Think about how much the average homeowner puts into this economy through renovating. This economy needs homeowners, that’s why they made the home renovation tax credit!
December 1, 2009 at 4:50 pm
Reading the blog and the comments from across the country has me thinking about a conversation I had at a friends house in Winnipeg a couple of years ago. I was commenting about how nice her house was and the luxury of having a brand new home on a manmade lake. The friend agreed with me and then responded that it wasn’t like Vancouver (my hometown) where everyone has “monster houses” but have to rent out 2 suites in their home to make ends meet. It got me thinking how different the home ownership experience is from province to province and city to city. Although my friend scoffed at rental suites, they are necessary in Greater Vancouver if you want avoid the house poor situation Gail’s blogging about.
In Vancouver, you get a “tear down” house for $400 000 in the worse part of the city. If you buy a middle aged or new home, in a decent neighborhood, you will have to have “mortgage helper” suites built in because, first, no one will buy a home without one (or two) when you resell, and second, you’ll get approved for a higher mortgage amount for a multi-family property, and thats the only way for most people to get their foot in the door in this kind of market, where they are still earning what other Canadians do, plus have to save much higher downpayments.
This is probably why more and more of our friends are buying properties out in the far far suburbs of Vancouver. To avoid being house poor, they are renting out the main house plus one or 2 suites, to cover the mortgage and earn some profit, and then renting a place closer to the city for themselves, so they aren’t commuting 2 hours a day. In the end, every month they are putting away the money they save (difference between their rent and the income from the rental property,after mortgage) in the bank so that they can save up the $125,000 downpayment they will need, to one day own a tear down in Vancouver. Or a house on a lake in Winnipeg if they choose. Alas, I choose Vancouver, and renting.
December 1, 2009 at 4:58 pm
Like many people we were approved for a mortgage for WAY more than I calculated we could afford. The funniest part was that I was 9 months pregnant and the mortgage lender said “Now I don’t know if you’ll go back to work, but that’s none of my business, you’re approved based on both of your incomes”.
So we bought a house we could afford on one income and I didn’t go back to work. At the time I thought for sure I would want to continue working but as it turns out I’m a home body and want to stay with the kids. Because we got a smaller house this was a decision we could make.
Our house is our investment in our kids. It is the launch pad for all of us into near-ish universities. We will pay off our mortgage sooner rather than later and save all the extra money for education funds. I must say the interior is the ugliest decorating you’ve ever seen and even the inspector, as professional as he was, had to say something:”Wow…um…well…uh…The walls are straight, sound, built to code and insulated. You can change the rest”. But it’s our home where we are raising happy kids (and as we can afford materials we’re making it prettier).
December 1, 2009 at 5:03 pm
The point of Gail’s article is – know what you can afford and don’t go beyond it. It is not about – is it beter to buy than rent. I think that people venture into home ownership with out looking at the big picture and down the road realize they made the wrong purchase – more than they can afford.
Right now I renting and the rental ($700 mth inclusive) is at Gail’s sugested 35% housing budget, there is also no way I can have a mortgage for the same amount as my rent.
Sure I would love to own a home – but I realize I can’t afford it.
December 1, 2009 at 6:01 pm
Richard:
You missed part of the math! I did this years ago.
Calculate the taxes and the difference in heating/cooling, water, electrical, and the interest component of the mortgage of owning a house versus renting an apartment according to needs. I was ahead! Notice that my calculation does not include maintenance and the time required to do maintenance.
If the value of a home increases at the same rate as the CPI or if the price of a home increases by less than the interest payed (usually the case in the long run), then a house is not an investment (but I do recommend selecting home maintenance to ensure that the value does not drop relative to CPI).
There is NOTHING wrong with renting.
December 1, 2009 at 6:17 pm
Geoff,
It was in fact our experiences living in Toronto that led hubby and I to “pay more for less house” in Calgary because it was closer in. I recall being stuck on the turn from the 403-to-401 in Mississauga/Toronto for almost an hour; hubby knows his dad’s commute from Pickering was about 20 minutes when they moved there when he was a young child, and more than 45 minutes by the time he moved out for university. I’ve in fact lived all over Canada (including Toronto, Vancouver and Ottawa) and I used to work in publishing and got sent all over to meet with authors, so I’m familiar with traffic all over North America. Calgary has real traffic now, unlike when I moved here and laughed at what I called “rush 20 minute” (instead of Rush Hour), but it still pales compared to some places. But its only going to get worse. So we bought a solid 1950 bungalow with developed basement and large yard, walking distance to schools, library and stores, just up from the river and a major natural area and park, and about 5 kms from downtown. It’s lovely–I can drive to the edge of downtown in 8 minutes, yet have all kinds of interesting birds migrating through the yard given all the old trees and river nearby–best of both worlds. Not that there aren’t things I don’t envy about newer homes (en suite bathroom anyone?), but for us, both lifestyle (more time!) and money (low travel costs for work, play and errands) factors showed this to make the most sense. Again, YMMV.
Oh, and whoever it was that mentioned the Calgary Herald Homes section? Don’t you just love the map of the new homes that are labeled “starter” “move-up” and “executive”? You can’t have folks just ’settling for’ (or being happy with!) a starter home now could you? Think of what that would do to the economy!
December 1, 2009 at 9:06 pm
word to the wise, if you plan on having a family and you plan on going back to work after your mat leave is up – childcare can cost as much as if not more than your mortgage.
right now our monthly mortgage costs are $1200 – our monthly childcare cost $1800 (for two kids).
we’re not house poor – we’re child poor!
December 1, 2009 at 9:27 pm
I agree with Dana – mortgage payment $1060, childcare and preschool $1350. We’re more child poor
December 1, 2009 at 10:10 pm
At 46 I’m mortgage free. We bought in 1994 at 8.5% interest for a three year term, bi-weekly payments, which would pay off the mortgage in 19 years. When we renewed, rates had dropped substantially so we got a 5 year term for just over 5%. Instead of going for the lower payment, we kept the same payment rate (+ about $40 more every two weeks) changed the length of the mortgage and knocked 5 years off our amortization.
So we paid it off in just under 14 years, and did not give the bank well over $75,000 in interest…we’ll be staying here until I retire, so now we just redirectly 1/2 of what we had been paying on mortgage payments into an account for property taxes and household repairs. Paid cash for the roof this year, will be paying cash for new windows next year.
This feels great. But with the low interest rates today, I feel badly for those who won’t get the same break we did. Rates are only going to go up, and with it payments. We got a big break with the interest rates going down as they did and we made a very smart decision to shorten our amortization period.
December 1, 2009 at 10:55 pm
I’m divided about the concept of your home as an investment. You always have to live somewhere so when are you going to realize the investment (I mean the increase in value of the property). I guess if you get really old and have to move into a care home, but that is very expensive in itself and at that point do you really care about the $400k you get from the sale of your home?
We have a lot of friends who are so proud they bought before 2004 & their houses have gone up in value by 25% or more (we are west coast) but what does it matter? Its not like they are going to downsize anytime soon and if they sell high they will certainly be buying high.
December 1, 2009 at 10:59 pm
Oh and one more question. We are still at the old ‘prime-0.8′ rate, so right now 1.35%. At such a low rate it seems like a better investment to put extra $ in the market, but on the other hand rates will likely go up so should we still pay as much as possible to the mortgage? Aside from the fact that we don’t know when rates will go up, when we renew at 2012 we will definitely get a much higher rate because nobody now is doing “prime minus” variable mortgages.
December 2, 2009 at 12:59 pm
I’m guessing that big city/medium city house costs are relative to wages, cuz what I am seeing makes me shake my head! Mortgage and childcare for Kim and Dana total more than my takehome, and I have a ‘good, government’ job!! Yikes, it’s no wonder I feel like the country cousin reading some of these posts. Just a few short years ago, one could buy a three bedroom, two storey, bath and a half older home in this city for around $50K! Now, those houses are going for $150K, but still a deal compared to other cities. I am a renter, and likely always will be, because by the time I save a down payment, and get myself into a position to be able to handle unforeseen emergencies, like a blown water heater, my sons will be putting me into a retirement home! Including utilities, my percentage is closer to 40%, but my transportation amount is less than 10%, so it balances out. I am close enough to walk to work, and most other places if I so choose. I work with several young ladies who bought homes this year – with help for down payments, and they are now realizing that they were not prepared in the least for such a venture. Not only are they having to pay those loans back, they have no back-up funds for the surprises that older houses have lurking. “Bit off more than I can chew” is one phrase I have heard, or “should have known there was something ….” when a cousin used all her garage sale money to “lend’ the down payment to my co-worker, so she could get the 6 bedroom monstrosity that takes two furnaces to heat (one of which broke down last month). If you can’t afford the rent on city subsidized housing, what makes you think you can afford mortgage payments of $900+ biweekly? I wanted to ask this, but didn’t, and expect that my co-worker will be trying to sell her nightmare within a year. From what I have seen, too many people are buying into the hype, and are not prepared, have not done the math, and are sadly regretting this missed step on the path to ownership. When, and if, the time is right for me, I will find what I would like to spend the rest of my days in. Until then, I am content to ‘make do’ with what I have – a four bedroom, two bathroom duplex, with garage and fenced back yard, for $700/month. Can’t get much better than that!
December 2, 2009 at 5:58 pm
@ Kerry
As much as it seems a waste to put money into the mortgage when the rates are so low, I think it is the better strategy in the long term because you’ll greatly reduce the amount of mortgage you have to renew at the higher rate you’ll get in 2012. The timeline is too short to take much risk with investments, in case you decide you’d want to cash them in to pay down the principal on your mortgage in 2012. If we had another market downturn, you’d be so upset with yourself.
Also, keep in mind that we pay all our expenses in after-tax dollars, and any earnings you would get on your investments still need to be taxed, unless they’re in a TFSA. Which brings us to the one exception to my “plan” of paying down your mortgage – max your TFSA(s) first, if you haven’t already. Remember, in January you can put another $5000 in.
Cheers and congratulations on that fabulous rate!
December 3, 2009 at 9:35 am
Thanks Jenny, makes sense! I was thinking of RRSP for the investments (still have room leftover from previous years – thats another story). My husband is very mathematical and likes to just compare rates & [expected] returns, but for me there is an emotional side. I think I will feel more comfortable when the mortgage is gone so that is a high priority for me.
Suzanne, I don’t know how much different salaries are in cities like Edmonton, Calgary, Victoria, Ottawa. I’m sure there are a lot of higher salaries but I would have though government jobs for the average person would be similar everywhere. I’m sure cost of living is higher but I don’t know how much more people make. Maybe people just have more debt
.
December 3, 2009 at 1:39 pm
@Suzanne: When we bought our first house 30 years ago our bank manager (who I had known since I was a kid) turned us down for the house we fell in love with so we ended up with door number two. At the time I was really angry with him but he did us a favour by keeping us from being house poor. After that every house we bought through our many moves was more than what we should have bought but hey!!!! the bank said we were good for it. We never made a profit on any of the houses we bought. Always seemed to buy in a fast market and ended up having to selling in a slow market. All in all with our moving/transfer/debt lifestyle we should have stuck to renting and banked the difference.
When we moved up here we rented a large two bedroom place with a garden for $600 a month plus utilities. At the time there were a lot of empty rental units so prices were good. There were not many houses for sale but the prices were great compared to the rest of Canada. We bought our small house three years later and it was a great price and a great mortgage rate. We only had a 6% down payment so had to mortgage 94% so we instantly had to pay $600 more a month plus utilities and maintenance. Although we managed to just make it within Gail’s 35% housing budget I still miss the $700 rent and the freedom it gave us. This is the time when we were able to really get our budget together and pay off our debts aggressively.
This time around we were not all that prepared for home ownership – at least NOW I know that thanks to Gail. We should have waited but we did get in on the market right before it skyrocketed. We went through a housing boom up here. Quite literally thousands of new homes built over a 7 year period. All land is owned by the Territory so lots are sold through a lottery and the government determines the price. The prices for houses more than doubled. And they are still building lots of new ones.
I suppose that I am glad that we are home owners and I know that to own your house outright when you retire is a form of security and comfort but…..it is expensive. Houses are an investment and you can make money out of it but you have to sell well or do that stupid thing where you borrow against your equity and the current real estate value. We could make a big profit by selling our house right now but then where would we move to? Could not afford to buy anything new or bigger and the rents have almost tripled up here. If we move south for retirement we will not be mortgage free as the housing prices are so much more down there – unless their market totally collapses while ours stays high.
I guess what I am trying to say is that renting can be comfortable and smart too. I did the math the other day and if we had put the difference between rent and mortgage away taking an average of $400 a month over 30 years (although I know it was way, way more sometimes) we would have just over $400,000 in the bank. None of our houses was ever worth that.
December 3, 2009 at 4:12 pm
Maureen; you asked a bit ago how to find older posts. The only way I can find the older posts on the new website is to go to the side bar (on this page) near the top and select the RRS feeds. It will open another window and on the side bar of the new window you can choose this month, last month, etc. You then can scroll down and see the post you are looking for. By using the links at the bottom of the post it will bring you back to the main post and allow you to post to it if you want.
Hope that helps.
December 3, 2009 at 5:02 pm
Re: Older Posts
If you look under the “recent comments” section on the blog home page, you will see a drop down menu for archives. It allows you to search by month as well.
December 3, 2009 at 6:29 pm
Joanne and Christy: Thanks for the suggestions and instructions. Have tried both and they work. I am a bit puzzled about the drop down menu for archives under the recent comments section. I have always had the word “archives” there but no drop down menu – until today. Either I missed it or it was playing hide and seek.
December 3, 2009 at 7:18 pm
Maureen,
The archives section is a recent addition. Glad to see it there as I had voiced a similar comment about finding older posts to Gail privately a week or so ago. I’ve been very busy with other things, and finally had some space to catch up with her blogposts of recent weeks–and then couldn’t find them! So glad to see an archives button again. Thanks Gail and your computer minions!
December 3, 2009 at 10:47 pm
One other reason people end up house poor…. they look for a house that needs nothing, has everything. If you are not willing to buy a house, in a good location, that needs TLC or more… but want a home already worked on past it’s value, then do not think of it as an investment but as a home. Be ready to LIVE in it for a long, long time before it’s value increases.
That’s fine, if that is what one wants but buying a house in disrepare in a great location can be a wonderful investement.
Our home, land value alone, over the last 32 years has increased from $40,000 to $425,000.00 Let alone the work we have done on the house itself which has added to the value. There is no stock out there that could have offered us this return, let alone allowed us to live in it.
December 3, 2009 at 11:49 pm
[...] Gail has some tips for not becoming house rich and cash poor. [...]
December 4, 2009 at 2:50 am
[...] Vaz-Oxlade points out that there is no piety in being House Poor and she gives you some hints on how not to end up that [...]
December 4, 2009 at 11:06 am
Christine – the days of buying a house in a good area, in disrepair, for a steal… are long over in most major cities in Canada. In Toronto you might get a 50K discount, but that still means writing a cheque for $400,000.
As an aside, if you invested $40,000 the 1st year and received an annual 8% return you’d have a value of around $470,000 after 32 years. If you achieved a 10% return, you’d have $844,000. Yes it might be difficult to achieve that every year, but from 2008 and backwards to ending 1981, there’s been no 30 year period in which the stock market returned less than 8% and many where it returned more than 12%. This doesn’t guarantee future performance, of course.
http://www.milliondollarjourney.com/investing-for-the-long-term-historic-market-data.htm
December 5, 2009 at 4:13 pm
I find it funny how here, in North America, people take up so much space! In Europe and Asian, people live on a lot less space. I know a couple who kept moving to a bigger house with each child they have! What’s wrong with siblings sharing a room?
Another argument for a smaller space? Kids grow up and move out. Yes, you are going to feel crowded during those teen years but it is temporary.
Having said that, it is tougher for us in the city. If you are want a nice neighbourhood and even if you are willing to accept a small, old fixer-upper, you are paying half a million and then some…and I don’t think we make 50% more than people in rural areas or small towns.
That is the price we pay for living in the city but does explain the house poor phenonmeon. In the big cities, in good areas, housing prices just don’t drop much, not even during this financial crisis. I don’t blame those who take a risk and jump in because chances are, if they don’t jump, they WILL miss the boat. Having said that, living in the city means you have public transportation, probably close to community centres and libraries, access to free festivals, etc. and other ways to live cheaply.
December 9, 2009 at 10:50 pm
[...] House Poor « gailvazoxlade.com [...]
December 11, 2009 at 11:30 pm
[...] House Poor « gailvazoxlade.com [...]
January 23, 2010 at 5:29 am
Good stuff here. Can’t wait for more. Keep it up.
February 17, 2010 at 6:24 pm
Well Gail, I emailed you before Christmas to get your advice about doing exactly this – getting out of being house poor – you sent me a very brief message saying I knew what I had to do so I DID IT. We sold our money-sucking, mind you gorgeous, home in a week and now we are looking for something half of the price and size. This will pay off all of our debts, mortgage, credit line, give us money for our kids tuition and then some. We haven’t found a house yet and we are being really careful to stay way under budget. It does feel good. I will miss this house but I think I will enjoy peace of mind more. Thanks for your excellent, straight-forward, common-sense money advice.