House Poor in Canada: Avoiding the Trap of Overspending on Your Home

Key takeaways:

Stick to the 30% rule: Ensure your monthly housing costs don’t exceed 30% of your income to avoid becoming house poor.
Plan and budget smartly: Build an emergency fund, prepare for future income changes and make a larger down payment to maintain financial flexibility.
Don’t sacrifice your entire lifestyle: Owning a home shouldn’t come at the expense of hobbies, vacations and financial security — balance your priorities. ‍

What does it mean to be house poor? It’s more than just money troubles

Being house poor means that while you may own a home, a large portion of your income goes towards housing costs like your mortgage, property taxes, insurance and home maintenance.

The term “house rich and cash poor” perfectly describes this situation — your wealth is tied up in your home, but you have little money left for other expenses, investments or savings.

Here are some quick financial signs you might be house rich and cash poor:

Your debt-to-income is higher than 40%, meaning that over 40% of your income is going toward housing costs like mortgage payments, property taxes and insurance. Ideally, it’s best to keep your housing costs below 30% of your income.
Your home equity represents more than 80% of your total net worth, with little else left in savings or other investments.
You have less than six months’ worth of savings to cover your monthly expenses in the event of a job loss, medical emergency or other financial setbacks.

This is not a rare problem limited to some Canadians, or certain demographics. Millions of Canadians are house poor, according to survey data from the MNP Consumer Debt Index, conducted quarterly by Ipsos.

Approximately one third of Canadians report feeling they are house poor.

Additionally, a fifth of homeowners report they regret their purchase. Other data suggest a growing number of people are devoting so much of their income to basic shelter costs that they have little — or nothing — left for everything else.

Equifax recently reported that mortgage delinquency rates are continuing to climb, especially in competitive housing markets like Ontario and British Columbia.

Plus, it’s not just about struggling to cover the bills. When you’re house poor, you’re also making sacrifices in your everyday life. Whether it’s giving up vacations, delaying retirement savings or constantly feeling on edge about surprise expenses, the emotional toll can be just as significant as the financial strain.

Is it even possible to avoid being house poor in today’s market?

With the average home price in Canada reaching $696,179, the soaring prices of home, and current interest rates, many are left wondering – is it even possible to own a home without becoming house poor?

The reality is that it’s challenging, but not impossible. Careful financial planning, realistic budgeting and a willingness to compromise on home size or location can help you avoid falling into the house poor trap.

Is it okay to be house poor?

While some might think it’s worth being house poor to own a home, the long-term financial and emotional impacts can be overwhelming. Being house poor can limit your quality of life and future financial security.

Why is this a dangerous financial position to be in? Even the slightest financial hiccup — like a job loss, unexpected repair, or increase in interest rates — can create significant strain. When too much of your money is tied up in your home, you’re left vulnerable, trying to hold on to an asset that you’re not fully enjoying.

Reasons you might become house poor

Many factors can lead to being house poor, including:

Overestimating your buying power: You may have purchased a home that’s beyond what your income comfortably supports.
Having dreams and hopes that get the better of you: Emotional decisions and a desire for a dream home can lead to overspending.
Unexpected home repairs: Major, unplanned expenses like a leaky roof or faulty plumbing can quickly eat into your budget.
Rising property taxes and insurance costs: As property values rise, so do taxes and insurance premiums, making it harder to keep up with expenses.
High-interest mortgages: If you’ve taken on a mortgage with a high interest rate or adjustable rates, your monthly payments may increase over time, leaving less room for other expenses.
Job loss: Losing a job or facing a sudden decrease in income can make it difficult to keep up with housing costs, quickly leading to financial strain.
Divorce: Going from two incomes to one, or managing mortgage payments alone, can leave you stretched thin and at risk of becoming house poor.

Who is more likely to be house poor?

Certain groups of homeowners are more at risk of becoming house poor, including:

First-time homebuyers: With smaller down payments and early-stage careers, first-time buyers often have lower incomes and higher monthly payments, leaving them more financially stretched.
Buyers looking to upgrade beyond their means: Homeowners eager to move into a larger, more expensive home may find that the increased costs quickly outpace their income, leading them to become house poor.
Retirees without retirement savings: Some retirees rely solely on their home’s value as part of their retirement plan. Without sufficient savings or diversified investments, they may find themselves cash poor, relying heavily on home equity.
Skipped or deferred payments: Some lenders allow you to skip a payment or defer payments temporarily, giving you breathing room to get back on track.
Debt consolidation: If you have multiple debts, consolidating them can simplify your payments and potentially reduce your monthly costs.
Convert to a fixed-rate mortgage: If you’re on a variable rate and worried about rising interest rates, switching to a fixed-rate mortgage can provide more stability and predictable payments.
New payment agreement: Reach out to your lender to negotiate a new payment arrangement that better suits your current financial situation.
Extend your amortization period: Extending the length of your mortgage can lower your monthly payments, although you’ll be paying more in interest over time.

Is downsizing an option?

If you truly regret buying your home and feel like you’re drowning in costs, downsizing could be a way out. However, it’s important to consider the costs of moving, including legal fees, realtor commissions and potential renovations to sell your home.

That said, if the numbers work in your favor, downsizing can free up home equity and lower your monthly expenses, helping you regain control of your finances.

11 ways to avoid becoming house poor

The best way to avoid being house poor is to prevent it from happening in the first place.

By making smart decisions before and during the homebuying process, you can safeguard your finances and maintain a comfortable lifestyle.

Here’s how to avoid falling into the house poor trap:

1.      Create a household budget before you buy

Plan and know exactly how much it costs to move out in Canada. Consider all the expenses involved in homeownership — moving costs, utilities, property taxes and more in your household budget.

2.      Don’t buy more house than you can afford

Stick to the 30% rule and make sure your monthly housing costs don’t exceed 30% of your gross income. Be realistic about what you can comfortably afford.

3.      Buy in an affordable area

Consider purchasing a home in an area where housing costs are more manageable. Many regions in Canada offer affordable housing options that allow for a better quality of life without stretching your budget.

4.      Make a larger down payment if possible

The larger your down payment, the smaller your mortgage. This helps reduce your monthly payments and interest costs, giving you more breathing room in your budget.

5.      Know the condition of the home

Be aware of the quality of the home before you buy. Have a home inspector look for any major repairs that may be needed, such as a leaky roof, aging plumbing or a cracked foundation, which can quickly become expensive problems.

6.      Build up an emergency fund

Before purchasing a home, ensure you have an emergency fund in place to cover unexpected expenses like home repairs, job loss or medical bills.

7.      Minimize lifestyle creep

Avoid the temptation to spend more as you earn more. Just because you have a higher income doesn’t mean you should take on a bigger mortgage or increase your spending on non-essential items.

8.      Prepare for income loss

Plan for potential income changes, such as maternity or paternity leave, or even an unexpected job loss. It’s essential to have a financial cushion to get through these periods without falling behind on housing costs.

9.      Budget for home maintenance

Homes require ongoing upkeep, from routine maintenance to larger repairs. Make sure you budget for these costs, so they don’t catch you off guard.

10.      Save for other life goals

Owning a home shouldn’t mean sacrificing everything else. Continue saving for important areas of your life, like hobbies, vacations and retirement.

11.      Minimize consumer debt

Keep your consumer deb (like credit cards and personal loans) as low as possible to ensure more of your income can go toward your home and other important priorities.

Conclusion

Avoiding the house-poor trap requires careful financial planning, a realistic understanding of what you can afford and sometimes even re-evaluating your values.

It’s important to ask yourself whether homeownership is worth the sacrifices you’re making in other areas of your life.

By sticking to the 30% rule, building an emergency fund, and budgeting for future expenses, you can enjoy homeownership without sacrificing your quality of life. Whether you’re a first-time homebuyer or reconsidering your current mortgage, making smart, informed decisions today — and aligning them with your true priorities — will safeguard your financial future and help you maintain the lifestyle you want.

by Thierman Financial

House Poor in Canada: Avoiding the Trap of Overspending on Your Home

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