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House Poor?

Written back in the whiz-bang days of historically low mortgage rates. As interest rates rise, the term House Poor may return to the vocabulary.

Nobody Calls it House Poor? That is an expression that you don’t hear much these days. Why it seems to have evaporated as a term when purchasing a house, is unknown. You rarely hear Realtors using this expression to dissuade potential buyers from binding themselves up in too much long-term debt (if anything, the opposite is true). The code phrase to other realtors would be for buying too much House now, might be “buying a house they can grow into.”

With  the current rate of interest for mortgages, it seems like a great idea to take on as much House as you can, especially if you are young because you have so many things ahead of you:

  1. You will need more space because you are going to have kids
  2. You will make more money soon because your career is only starting
This House MIGHT be a bit of a stretch for you, but you can grow into it.
This House MIGHT be a bit of a stretch for you, but you can grow into it.
Photo by Mike Alexander

Yes, a real estate agent told me that, in 1990 when we were looking at our first house, but I didn’t fall for it, and back then, our first mortgage rate was 12.9%, so we locked in for five years (that was a great deal back then!). We didn’t overbuy at the time because with interest rates so high, adding more to the principal meant a higher monthly payment.

These days you can get a mortgage at 2.95% (at best). Thus adding more principal wouldn’t change much. You might even be tempted to borrow more money to:

  1. Get some new appliances for your house
  2. Consolidate your credit card debt
  3. Add in your moving expenses, land transfer taxes and maybe a nice vacation
  4. Add in your Student Loans

At that rate of interest why not?

Allow me to be clear in my answer, “What are you NUTS ?!?“. We live with historically low-interest rates, which will eventually go up. What do you do when that happens? Assuming the rates can’t go up because the fragile economy will catch a bunch of folks off guard is my guess.

Anybody else ever heard the expression House Poor lately?

Feel Free to Comment

  1. Not lately, but I’m sure it will become one of those rebound words in time. For those not understanding the term, it might make sense in due time. There is nothing “different” this time, as most seem to believe… – Cheers.

  2. I have a friend and a relative who both decided not to move to a bigger house a few years ago. They both have now paid off their mortgages, one before 40 the other before 50 and they are very, very happy they didn’t upsize. They have been able to travel more, enjoy more sports etc with the money they didn’t waste. And their kids are fine too. It’s important not to get sucked into the need for bigger just because of what some other people want, if it’s not want you truly want.

  3. Ignoring the idea of borrowing for depreciating assets/vacations, if someone has a lot of credit card debt, they probably shouldn’t be getting a mortgage in the first place.

    However, if that credit card is charging them 20% interest, consolidating that debt into 3% seems like a valid strategy. Even if 3% turns into 10%, it’s still a lot better than 20%…

    1. I think your first point is correct, but that won’t stop a bank from “trussing them up like a Christmas Goose” in loans either.

      I really don’t like the second part, pay off the credit first THEN get a mortgage.

  4. In the U.S., they have balloon interest payments (or did have). Low interest rates upfront then HUGE interest rates after a few years. People bought into huge houses they could only afford at the low interest rate, counting on being able to pay the higher interest rates later.

    Except they couldn’t afford the high interest rates later. And the result? The U.S. housing collapse of a few years ago. I personally spoke to Americans in the throes of losing their homes as the result of huge interest rate increases.

    By comparison (not contrast!) we’re enjoying record low interest rates in Canada. At 2.99%, how much lower can they go? There is a bottom limit on this. How much higher can they go? A lot higher. What happens if your mortgage that you can afford at 2.99% goes to 8.5%? Do you lose your house?

    What consumers should be doing IMO is mortgaging for an amount they can afford at a higher interest so that they’re safe when that time comes. Then use the low interest rate period to pay off the balance as fast as you can.

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