Stop Being House Poor Today!
Are you feeling house poor? Dave Howell shows you how to take more control of your finances and, how using the latest digital tools can make you feel house rich!
Owning your own home continues to be a key ambition for Briton’s. The latest figures from the FCA -Financial Conduct Authority - reveal the value of new mortgage commitments (lending agreed to be advanced in the coming months) was £63.8 billion, 4.5% higher than a year ago.
Also, the FCA makes it clear that more is being borrowed, as the share of mortgage loans with loan to value (LTV) ratios exceeding 90% increased to 4.5% in the first three months of 2019, compared to 3.3% a year earlier. This is its highest since 2017. With this background, are you feeling house poor?
According to Investopedia, house poor is defined as: “A situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities. House poor individuals are short of cash for discretionary items and tend to have trouble meeting other financial obligations.”
The drive to become a homeowner can in some instances mean over-stretching the financial resources that are available. It’s very easy with a mortgage offer on the table to take the offer without assessing the other commitments you might have or, how other areas of your life might change.
Says Ross Duncton, Managing Director, Head of Marketing and Direct, at BMO Global Asset Management: “UK millennials simply aspire to achieve what previous generations have enjoyed; and they do it with a fortitude that helps them survive in a post-credit-crunch world. While some have debt, it’s clear that the majority are far from a reckless generation.”
“In reality, most are sensible spenders who want to take more control over their money, despite a lack of formal financial education and income,” Duncton continued. “Our research reiterates how small a leap many Millennials need to take to help brighten their financial futures; many only need to shift their money mindset slightly to get their money working harder, and in turn help them achieve their ambitions.”
Avoiding potentially becoming house poor is about taking a step back and, assessing your overall financial health. With this information in-hand, you can make solid financial decisions that protect your income and helps you support the lifestyle you want.
Whether this includes becoming a homeowner now or later, will become obvious to you once you have taken the time to understand how a mortgage could fit into your overall financial planning.
The key to avoiding become house poor is to take control of what you are spending. The general rule is not to spend more than 30% of your income on mortgage payments. In addition, take a close look at your debt to income ratio. You can use this handy calculator
to see what your ratio is.
Also, owning your own home will require additional costs. The maintenance of your property must be diligently considered, as this has to be carried out to ensure your home preserves its value. Ignoring these chores could lead to larger bills later on.
If you have your heart set on buying a home, the hard question you need to ask to avoid potentially becoming house poor, is whether you should buy at all? You may be in a financial position that would mean a mortgage would be approved if you have had your job for a few years and have a good credit rating.
Think about your short-term plans. If you think you’ll move home within five years, perhaps renting would be a better option. Do you have other plans such as extensive travel or want to spend significant amounts of money on other things? And how secure is your job at the moment?
A common response when renting is considered is that this is a waste of money. The reality can be very different: Investing in a home could bring you a healthy return over the long term, but this is by no means guaranteed. You should not see buying a home as your pension provision. There are simply too many factors outside of your control that could ultimately impact on the resale of your home in usually two decades time.
Also, the FCA in their report make the interesting point that in 2017, 62% of under 35 homeowners were helped financially by family and friends to buy their home. And that a growing number of later life mortgage options are now available to older buyers, with lenders offering terms that the borrower will be paying into retirement and significantly beyond. This new approach to mortgages with house buying delayed, could be one component of helping everyone avoid becoming house poor.
Being house rich!
Looking closely at your overall financial life and how your accommodation impacts on your ability to pay your bills, is the practical approach to tackling the issue of being house poor.
It’s a myth that the Millennial generation, for instance, have little interest in long-term financial planning. Indeed, according to research from Revolut, £174 a month is being saved by this group.
The same research also found that 78% don’t want to rent for the rest of their lives. There is clearly an ambition to become homeowners, the question is, when to buy and how much you should be spending. The so-called ‘stretch’ to afford a new home is a sure way to becoming house poor.
In addition, the priorities of this group have shifted. According to research from Deloitte: “Their priorities have evolved, or at least been delayed. Having children and other traditional signals of adulthood ‘success markers’ do not top their list of priorities. Instead, they’d rather travel and see the world (57%) versus buying a home (49%) and help their communities (46%) versus having children (39%).
Wouldn’t it be great to have an overview of your entire property to keep an eye on costs that could mean you may become house poor in the future? Using a dashboard approach like Habiplace gives you those insights. What’s more, you can see how your housing and ancillary costs add up, and whether they are still affordable. Armed with this information, you can make changes to these costs and avoid becoming house poor.