Sunday, 13 December 2015

Are you house rich or house poor?




According to Statistics Canada, about one-quarter of Canadians are spending too much on housing costs.  "Too much" is defined by Canada Mortgage and Housing Corporation (CMHC) as 30% or more of household income.  So saying that,  Are you House rich or House poor?

The CMHC refers to household income as being pre-tax.  Now the take home for most households will be different due to the tax system and it's many variables.  There can be a big difference in after-tax income between 2 households with identical incomes.  

According to CMHC, housing costs refer to costs such as rent, utilities for renters.  For homeowners, it includes mortgage payments, property taxes, condo fees and utilities.

The 30% rule does ignore other substantial factors.  What if the household has 2 cars and the other household has no cars.  What if one household has kids, the other household none.  Cars and kids are not cheap.  There will be differences for sure as no 2 households have the same variables.

With young couples, they are often wondering if they can afford their dream house, without breaking the bank.  Taking on a bigger house and a bigger mortgage can limit other things which may or may not be important.  Retirement savings might need to be scaled back.  The annual family vacation might need to be scaled back.

The baby boomers, are considering downsizing their home.  In some cases, it's because the person has more house then needed once the kids grow up and move out.  Also if they sell and move outside an expensive city like Toronto or Vancouver, the money from the sale can pad retirement.

House poor can also be determined by how much savings is readily available?  Do you have 6 months of emergency money in case of loss of income for whatever reason, loss of job, injury, sickness?  This 6 months of savings should be outside of any registered accounts but if the worse happens, then registered accounts can be used.  Mind you, tax considerations should be kept in mind.

I have known more than my share of people within my circle that have ignored RRSP contributions entirely for their entire working career.  Their objection is that they have to pay the tax back eventually and they do not want to be stuck with that burden in their golden years.  This starts a deep conversation at social events.  They pour all monies into their house, which is fine but remember that when they stop working, and it will happen, the house will be paid off but savings will be almost non-existence.  That would be a definition of house poor.  Beautiful house, no money to buy anything else.  The flip side of having to pay the tax back later in life can be argued also but they fail to realize that they can somewhat control the tax paid back later in life, either as straight RRSP withdraws (with no other income of course) or through a RRIP, the tax will be a bit lower than the 40% rate paid during your peak working years.  you can withdraw as much or as little and pay the tax rate associated with your withdraw amount.  Hopefully your mortgage will be close to finished but then you will not be house poor.

One thing to remember that the 30% rule is just a guideline or rule of thumb.  No important decision should be made without doing your home homework on the topic.

To sum up the main points to determine if you are house poor:

Is your mortgage payments more than 30% of your after tax income?

How much is your after tax income?

Do you have 6 months of emergency money in case of loss of income for whatever reason?

Do not pour all your money into your house and ignore your RRSP.

Are you house poor or house rich?