Growth & Jobs | Managing homeownership debt in the new year

Buying a house is part of the Jamaican dream and many persons pursue homeownership because of the advantages it offers, including increasing their net worth.

While homeownership is a worthwhile endeavour, it’s also a major financial undertaking, one that requires significant capital. Not only does it involve a hefty down payment and other upfront costs, but a homeowner is also expected to fork out a good sum of money each month for a mortgage. After the acquisition, there are also other financial considerations, including maintaining the house, property taxes, and for some persons, strata or maintenance fees. All this can leave an individual financially drained, with very little savings – a financial cushion – or even very little money to meet their other financial obligations.

“Unfortunately, this is a reality for some Jamaicans, especially young persons,” said Dave Hanson, manager at JN Bank. “The truth is, many people fail to plan before they embark on the journey of homeownership and often place themselves in a difficult financial situation,” he said.

“Many people use all their savings, and then some, to finance the down payment and other related costs on their property. After the purchase, although they may now be a homeowner, they are pretty much dry where having liquid cash is concerned. This is what experts refer to as being ‘house poor’.”

Hanson noted that ‘house poor’ is a term used to describe a person who spends a large portion of his or her total income on homeownership, including mortgage payments, property taxes, maintenance, and utilities.

He explained that buying a home you cannot afford and tying up all of your cash into a down payment and income into mortgage payments is the most obvious way of becoming house poor.

However, a homeowner can also grow house poor if their housing costs increase dramatically. “This can be due to increasing property taxes and/or rising interest rates. If your income drops or you lose your job, this can also create a challenge,” Hanson said.

ASSOCIATED COSTS

The JN Bank mortgage expert noted that to avoid this situation, prospective home buyers must plan and save in advance to ensure they are financially ready for the responsibility of homeownership. “Not only do you need to be saving at least two to three years in advance, but you should also ensure you purchase a property within budget. Assess whether you can comfortably afford all the associated costs, including the mortgage payments.”

He noted that a homeowner’s mortgage payments or housing costs should not exceed 32 per cent of their gross income.

Hanson further pointed out that for persons who are already in the position of being house poor, there are a few things they can do to get their finances in order.

“Individuals can consider limiting discretionary expenses, taking on another job, selling assets, or downsizing in order to ease their financial difficulties,” he advised.

If expenses on housing seem overwhelming, perhaps there are areas of the budget where spending can be reduced, said Hanson. “Maybe you can consider trading your current vehicle for a lower-payment vehicle, or maybe selling the car altogether until you have repaired your finances.”

Another consideration is to find a second job or a side hustle to help with the expenses. “Probably you can consider tutoring, baking, or even finding a remote job on the Internet that will help you supplement your budget, so you can meet your monthly bills,” he suggested.

He said refinancing the mortgage may also be an option, especially if interest rates have fallen. Moreover, persons can pull some cash out of their home’s equity if they have that option.

If none of these options seem feasible, Hanson said homeowners also have the option to sell their home.

“Selling may allow you to move to a less expensive property with lower payments. While selling may not be your most favourable option, it allows you to obtain the funds you need and potentially save for buying a new home in the future,” he noted.