At least once every week I talk with someone who purchased a house one or two years ago, and now they are in financial trouble. What happened?
Owning a home is an ongoing fiscal burden at the best of times, and it’s always at the mercy of unexpected expenses (not the least of which might be a hike in interest rates). More than that, you add some of life’s eventualities to the list, including children (hello, maternity-leave income cuts and the call for a third-floor addition), the loss of a job and a crumbling roof, and you’ve got a full-on argument for the need to plan ahead.
The Mortgage is Just the Beginning
Many new home owners get into trouble because they underestimate the cost of home ownership. It’s easy to calculate your regular mortgage payment; the bank will do that for you before they give you your mortgage. Your real estate agent may even convince you that owning a home is cheaper than renting. They will say “You’re paying $950 per month to rent, but with low interest rates your mortgage payment will only be $900 per month!”
Sounds like a great deal, until you realize that it’s more than just the mortgage payment. You’ve also got property taxes, utilities (hydro and gas, which will cost more in your new 10 room house than they used to cost in your three room apartment), and repairs and maintenance (you are the landlord, so now when it breaks, you fix it).
So now your $900 mortgage payment is closer to $1,500 in monthly housing costs, and that’s not all.
You need furniture for your new, bigger house. You want a patio set and a barbecue so you can have your friends over. You need a lawnmower, and some plants for the garden.
Unfortunately most people don’t have $10,000 cash in the bank after they buy their house; all of their savings went towards the down payment. So what do you do?
Probably using credit cards, because now that you’re a homeowner, you qualify for a much larger credit limit on your credit card! It’s a form of credit creep. You need to buy some big ticket items, you qualify for more credit, so you use more credit.
Finally the Downward Cycle
And so the downward cycle begins. Your monthly payments are higher than you thought. The washing machine breaks so you buy a new one. Then you buy furniture on credit, so now you’re paying more to your credit cards each month.
Then an emergency happens. It may be car repairs, or perhaps your hours are cut back at work, or you lose your job. Now it’s even harder to make the payments.
It’s Time To Hit Reverse
What can you do?
First, try to free up extra cash each month. That may mean reducing your expenses, or increasing your income (perhaps by renting out your basement, or getting a part time job).
If you can’t solve the cash flow problem, the next option may be to consider selling your house. It may have increased in value since you purchased it, so by selling now you may be able to pay off the mortgage and selling costs, and find a place to rent. By getting your monthly living expenses under control, you may be able to start saving again, and buy another house in the future.
If you want to keep your home but you’re afraid you will fall short on your monthly mortgage payment because of other debts, it might be time to speak with a licensed insolvency trustee to learn about your options. It is possible to keep your house in a bankruptcy or by making a debt proposal to your creditors.