House poor (or house broke) means all or most of your wealth is tied up in your home.
The house poor definition is that your mortgage payments, property taxes and related bills are taking a significant portion of your net income. You may have a beautiful home, but your bank balance is worryingly low.
Being house rich cash poor is a frustrating problem. You need to put money into your house to maintain ownership and for the house to retain its value. But you are liquid asset poor, non-diversified, and have little cash for other expenses.
But if you were to sell your home or reduce payments, while you would have more financial freedom you might lose your home or have one that’s dropping in value from neglect.
Am I house poor?
Up until the Coronavirus crisis, housing prices in the UK have been on the rise, making it harder and harder to make ends meet on our average incomes, which are not rising as quickly. Although figures are not readily available in the UK, it can be assumed that more and more people are qualifying as “house poor”.
So, are you house poor? This depends on your house costs relative to percentage of income. To determine if you are in fact house poor, use the 28 36 rule. It works like this:
- No more than 28% of your gross monthly income should be spent on home-related expenses including mortgage payments, repairs, council taxes, utilities, even furniture.
- No more than 36% of your total debt (how much you owe each month including home payments, car loans, credit cards, school fees, etc) should be from your mortgage.
This is a calculation many mortgage lenders use to determine how much to lend you. They are not allowed to give you a high mortgage if they expect you will default on it.
If you are house poor, according to this ratio, it may be time to face reality: you are living in a home you can’t afford.
Money Dashboard makes it easy to calculate this 28/36 ratio. Simply link up all your accounts, and any obvious home payments like mortgage and utility bills will be automatically tagged in the “home” category. Compare this to your "income" category. You can tag any extra or unlabelled shopping expenses or bills as “home” for a more accurate picture. Similarly, you can use the category tools to compare your home expenses to your overall monthly debts.
House poor solutions
Emergency situations happen. Salaries change. From health to car trouble to job loss. When and if that time comes, being house poor is going to be a problem.
If you would like to be less “house broken” there are a few potential solutions:
1) Limit expenses. Add up all of your home expenses (Money Dashboard makes this easy) and review them all. Ask yourself if any are unnecessary and can be cut back. Maybe there are other unnecessary expenses, like vacations and shopping that can be limited to ease the strain. Here are some tips for spending less and saving more.
2) Increase income. This falls into the easier said than done category, but increasing income will enable you to stay on top of payments more comfortably and rise out of “asset rich cash poor” status.
3) Dip into savings to ease financial difficulties. If your financial difficulties are temporary, like scrambling to pay for a boiler replacement, or you are facing a loss of income between jobs, it can be easier to dive into savings (if available) rather than prolong the financial strain month over month. If feasible, paying down debt (like a big chunk of mortgage) can lower interest rates or quicken time to mortgage payoff, even reduce your monthly bills when renewed.
4) Move out. If none of these options seem possible, you can always sell your home or rent it and move into a less expensive place. It is better to do this when there is no financial emergency so you don’t feel compelled to take a bad offer out of desperation.
We have more content about this topic - see our article What is a HENRY?
