House Poor Canadians | by Guest Author Linda Stern, Licensed Insolvency Trustee
Are you House Poor?
Housing costs form the largest chunk of the pie in most household budgets. This includes rent or mortgage payments, property taxes, maintenance and utilities. You are house poor if your housing costs are so large that you have little discretionary income left at the end of the month and are struggling to make ends meet. Also referred to as House-Rich-Cash-Poor, this phenomenon is, surprisingly, not exclusive to low income families. In cities like Vancouver and Toronto, where home prices have risen very steeply, even seemingly well-off families, in their million-dollar homes, live house poor. And the problem is getting worse.
Anyone with lived experience of home ownership in the 1970’s will shudder at the recollection of those times. While house prices were much lower back then, people contended with the sting of double digit mortgage rates. Peaking to over 20% in 1981, monthly mortgage payments sucked up large chunks of most incomes. It was an awful financial period for many households that lived house poor.
Thankfully since then, interest rates have declined. Subsequent decades heralded in a climate for housing affordability and growth in the middle class. Today, we have a whole generation of Canadians who have only seen very low interest rates. Money is cheap to borrow and we finance purchases like cars, furniture, appliances and electronics. We even readily take out student loans to finance our education. Saving for a larger downpayment or future retirement flies in the face of instant gratification. It is a cultural norm to spend today rather than save for tomorrow. We no longer set money aside for the proverbial rainy day.
Interest Rate Hikes
On July 11th, 2018, the Bank of Canada raised its benchmark interest rate to 1.5%. This was the fourth increase in one year. In tandem, lenders raised their variable mortgage rates. The impact was felt by anyone with debt, especially mortgage holders. Your monthly mortgage payments just got bigger. The amount depends on the size of your loan and negotiated interest. Regardless, you may now be wondering what to give up to accommodate $200 or $400 of additonal monthly mortgage expenses.
While we are unlikely to see double-digit mortgage rates return, interest rates have inched up since 2017. And house prices have risen sharply since the mid-1990’s. The current economic climate suggests that home owners should plan and budget for the above scenario often over the next few years.
With income growth flatlined and an increase in temporary, contract and part-time jobs, we are squarely facing the same precarious times as the generation who lived through double digit mortgage rates. They could teach us a few lessons about living house poor.
House Poor: Examine your Situation
First, they would caution us to be financially mindful and take stock of our income and expenses. Thousands of individuals purchased homes, counting on a steady income and payments based on negotiated mortgage rates. A change in circumstances, like parental leave, a job loss, illness or marriage breakdown can drastically reduce your income.
At the other end of the problem are unexpected expenses. If you do not have an emergency fund set aside and are living paycheque to paycheque, then interest rate hikes, such as those outlined above, can leave you financially strapped. Add into that equation everyday life, like raising children, unplanned dental costs or a sudden auto repair bill. It is, in fact, not difficult to imagine why families fall into debt.
If you find yourself house poor or remain at the brink, then the solutions depend on the severity of the problem. Ask yourself if the situation is temporary or permanent. Parental leave, for example, can leave families financially challenged for a few months until the parent returns to work. In such cases, speak to your financial advisor or bank manager. You may qualify for low interest, short term financing. Relying on credit cards or payday loans to tide you over is the worst thing to do. They carry the highest interest rates, often in the double digits. You will simply finance your cash shortfall with unnecessary high costs.
On the other hand, if this is due to a long term and systemic problem with your finances, then it is time to get a grip on the situation. House poor individuals are at risk for spiralling into unmanageable debt. And chronic, long term debt leads to mental and physical health complications as well as credit score problems.
Some individuals in this situation need to go through an important paradigm change, first. If your home has appreciated in value, then you must stop considering it a means to find extra cash. Many home owners resort to Home Equity Lines of Credit (HELOC) to access cash. You end up further exposed to interest rate hikes with such financial products. Your HELOC, in fact, enables you to ignore your debt; it keeps you from fixing structural problems with your income and expenses. This is a “bandaid” solution. It will only increase your long-term debt load.
Income and Expense Management
Cash shortfalls can be fixed in two practical ways: Increase your income and / or reduce your expenses. If practical at all, homeowners can consider options like renting out a basement suite or listing a spare room on Airbnb to increase income. If your time permits, turn a hobby into a side gig. And of course, you must never discount the possibility of negotiating a pay raise or finding a higher paying job.
To manage your expenses, you must first visualize where your money goes. Creating a budget is a helpful way to start this investigation. In fact, you can receive professional help with this exercise through a credit counsellor. They have access to budgeting tools and industry knowledge about credit and debt and can recommend custom solutions tailored for your specific situation. You do not need to be in serious financial problem to seek out these services.
House Poor with Mounting Debt
If you are already house poor and going down the rabbit hole with mounting debt, then a credit counselling session is a must. Your credit counsellor can negotiate and consolidate your debt with creditors. Your repayment terms become easier, often with reduced or waived interest. This alone can free up cash to help you manage a healthy budget.
Living house poor is a cruel reality for Canadians at every income level. Almost always, it happens for reasons beyond your control. Very rarely does it occur from willful neglect of your finances. Yet, many people have difficulty seeking help for mounting debt because of the associated shame and stigma. If you are in this situation, do not despair. Every debt problem has a solution – even the most dire ones.
Linda Stern, a Licensed Insolvency Trustee, is a guest blogger for Family and Credit Counselling Services, a blended not-for profit community-based agency offering debt counselling & management as well as family & individual support services within York region.