Are you house rich, cash poor or house poor, cash poor?
Owning a home isn’t all fun and games. In fact, many Kenyans homeowners struggle with the expenses that keep everything running on the home month after month.
Even if you’re able to afford to buy a home and get approved for a mortgage, more than a third of homeowners have come up short when affording their current expenses.
Researches have warned home buyers about the importance of not being “house poor” and being careful not to use all of their disposable income when purchasing their home. However, what happens in the years afterwards, when their biggest asset increases in value while their disposable income diminishes into nearly nothing? Where do buyers go wrong?
For younger buyers, it’s often simply explained by more money needing to go out than is coming in. We see this kind of cash crisis more often in the younger group of people, with a mortgage, young children, education, there are so many multiple demands for that income.
What does being House Rich mean?
Being house rich is a situation that describes a person who spends a large proportion of their total income on homeownership, including mortgage payments, property taxes, maintenance and utilities.
Basically, you are paying more for your home than you can afford or simply buying too much home.
If you have to pay more than 40% of your income for your dwelling, then you will become cash poor.
Matter of fact, if the value of your home decreases, you can be both house and cash poor. When you are house rich that means all your money or wealth is tied up in your home.
How can you avoid being Cash Poor?
Number one: You’ll need to stay away from variable rate loans. The ARM, or “adjustable-rate mortgage” loan is too dangerous. Any loan product that can change at the drop of a hat and without a moment’s notice is too risky.
Moreover, what you need is a fixed mortgage rate. A fixed-rate loan allows you to plan the monthly budget in advance.
Number two: Buying a home for less than you can afford is a start. If your lender approves you a Kes 5 million loan, you take Kes 3 million instead. The goals are to simultaneously invest that money and pay down your mortgage.
Things to keep in mind:
- Buy less home than you can afford
- Spend no more than 25% of your income on the housing payment
- Invest the difference of the savings you received from not paying the full amount approved for
- Stick to a housing budget
- Have emergency savings
It sounds so simple, but most Kenyans are actually living beyond their means and buying homes than they can afford. However, if you follow the above instructions, you’ll forget about being cash poor.
