The perils of being house poor: Gen Xers buck the trend

Younger homebuyers don’t want to max out on their mortgage payments, according to a recent TD survey. Could it be that Gen Xers have learned a few lessons from older home owners who qualify as house poor?

The survey found that Gen X Canadians overwhelmingly consider themselves “house plus” buyers who want enough flexibility in the budget to afford things like travel after their monthly payments. Just 14 per cent consider themselves “house all” buyers who go to the higher end of what they can comfortably afford when it comes to their mortgage, leaving less room for discretionary spending.

The findings reflect what many financial experts see in their daily dealings.

“Younger adults have figured out that experiences provide far more happiness per dollar than stuff and that a big mortgage payment severely limits how much money you can spend on travel and other experiences,” says David Weliver, founding editor of Money Under 30.

“But with a mortgage payment that’s 40 or 50 per cent of your take-home pay, having less money to travel is the least of your problems. It’s going to make it extremely hard to save for the future and it makes you extremely vulnerable in the event of job loss.”

A common measure of housing affordability (which include expenses like property taxes) is 35 per cent of your income, according to licensed bankruptcy trustee J. Douglas Hoyes, cofounder of Ontario’s Hoyes, Michalos & Associates Inc. If you’re over that amount, you’re at risk of being house poor.

You can end up chained to your mortgage if you buy more house than you can afford or if your financial situation changes as a result of things like job loss or divorce.

“When you’re young you want to be able to go out for dinner and drinks with friends. You want to go on a nice vacation. You may want to get married and start a family, and that’s difficult to do when a big portion of your income goes towards a mortgage payment,” Hoyes says.

“That’s why many people are deciding to rent instead of own,” he adds. “If you work in a big city it’s a lot easier to rent and live close to work than it is to buy.”

Younger people who want a home to call their own yet still have funds for holidays as well as RRSPs and RESPs have a lot to consider.

The crucial starting point is the math.

“Crunch the numbers,” Hoyes says. “You need to know how much you can afford to pay each month for living costs, and you need to understand what it costs to own a home.

“Many first-time home owners take into account the obvious costs like mortgage and property taxes but ignore the less regular costs like repairs and maintenance, home renovations, landscaping, and so on. If you move to a bigger house, your utility bills will be higher than when you were in an apartment, so that cost must be considered as well.”

He suggests doing some simple research in the form of talking to home-owning parents and friends.

Then there’s the need to take other financial obligations into account.

“If you have other debt, such as a large student loan if you’re a recent graduate, it may be prudent to pay off your other debt first before you consider mortgage debt.

“Stress test” your assumptions as well, Hoyes says. Perhaps you can afford the mortgage itself, but what happens if you lose your job or your hours are reduced at work? Do you have an emergency fund to get you through a period of unemployment? There has to be some breathing room so that you don’t end up stretched too thin.

Downsizing, finding a smaller home with a smaller mortgage payment, or even relocating are other options.

“Many young adults need or want to live in large metro areas that have good job markets and access to culture and a good dating scene, but these are some of the costliest places to live,” Weliver says. “Moving to a more affordable part of the country if your job allows is a step that might be necessary if you want to — wisely — keep your housing payment to a reasonable percentage of your income.”