The 2022 federal budget made way for a new tax-free savings account (TFSA) designed specifically for first-time home buyers in Canada. The account ultimately combines the advantages of the existing TFSA and registered retirement savings plan (RRSP) – popular down…
If you’re someone who is interested in taking the jump, and getting a mortgage, but you have student debt…This article is for you. Today, we explore if it’s possible to get a mortgage with student loan debt.
- Yes, you can get a mortgage with student loan debt
- Debt affects your credit score, and might significantly impact how much you can afford a mortgage
- The gross debt-service ratio and total debt-service ratio are the major considerations for calculating mortgage affordability
Can I get a mortgage with student loan debt?
On average, Canadian students pursuing full-time undergraduate programs paid an average of $6,693 in their tuition for the 2021/2022 academic year, which indicates a 1.7% increase in fees from the preceding year.
Similarly, graduate programs saw their average cost rise by about 1.5% to a new benchmark of $7,742. These increased payments are comparable to those of fall 2020/2021. It takes about three or four years for program completion, and multiplying this cost over the years shows that at least $20,000 is the expected expenditure in tuition before bagging the degree.
Coming up with this sum upfront can be extremely difficult, which is why many people opt to take our student loans. Post-graduation, the loan repayment is due, and it’s time to start paying that debt off. Unfortunately, this usually coincides with the same period that most people plan to buy a home.
So, with that realistic view in sight, yes, your education loan can end up affecting your home loan.
Paying off student loan debt may continue for as long as 9 to 15 years, so can you get a mortgage with student loans in Canada? The long and short of it—yes, you can. But you need to acquire the right knowledge for it.
Mortgage Considerations for Post-Grad Students
It is possible to get a mortgage with student loan debt. However, the downside of buying a house with student debt is that your mortgage affordability would be impacted. Mortgage affordability refers to the amount that you can borrow based on factors like your present income, living expenses, and debt.
Higher mortgage affordability typically implies that you would be able to purchase a higher-priced home. To calculate mortgage affordability, two ratios are used:
- The gross debt service ratio
- The total debt service ratio
Both ratios consider baseline factors like living expenses, debt, and income to arrive at a maximum amount you can afford to buy a home. The gross debt service ratio, which is the first affordability rule, doesn’t factor in student loans.
The total debt service ratio, on the other hand, considers the total amount you have in monthly debt payments alongside other factors like taxes, mortgage principal and interest, and housing and heating costs. This second affordability rule states that the total sum shouldn’t exceed 42 to 44% of your gross income every month depending on your credit score. Student loans are accounted for here because the ratio considers all debts. So, student loans and mortgage applications are intertwined.
To shed more light, here’s a hypothetical situation:
Say, you earn $65,000 per year and your partner earns $55,000 totaling $120,000 with a $70,000 down payment. A fair mortgage interest rate of 1.65% places your maximum purchase price at $618,463. Including monthly student loan payments of $900 every month, the figure comes down to $560,716. This implies that your maximum affordability is impacted up to $57,747.
This would be further exacerbated as more debts are added, and your maximum affordability would drop even more. However, this is how to buy a house with student loan debt. Beyond student loan debt, some other factors can impact your maximum affordability.
Your credit score is hugely considered during the mortgage application process. This score is impacted by debt, and as such, your student loan debt, just like any other debts, would indirectly determine whether or not you’re able to get a mortgage.
Student loans fall under debt reportable to Canada’s major credit bureaus, Transunion and Equifax. Regular payment of credit score without fail would have a positive effect on your credit score.
In like manner, your student loans can negatively affect your credit score if you have either been irregular with payments or you’ve been making late payments. So, does OSAP affect mortgages? Yes, it does. A lower credit score can prevent you from getting mortgage approval.
If you don’t pay up your student loans, loan servicers buy student loan debt but do not act as a student loan broker. In other words, your credit score would continue to be negatively affected.
And does owning a car affect OSAP? Only if your vehicle’s value exceeds $5,000.
Credit Card Debt
Credit card debt would not prevent you from mortgage qualification, except your monthly credit card payments are on the high side, and your debt-to-income ratio exceeds what lenders permit.
Ideally, your entire debt load shouldn’t exceed 42% of your gross income. This is in addition to monthly house maintenance costs. This percentage is also referred to as the total debt service (TDS) ratio.
You may still qualify for a mortgage with your TDS ratio somewhat higher in certain cases. However, a higher TDS ratio is indicative of the fact that you’re likely piling up on debts beyond what you can afford.
Increase Your Income
This is a pretty difficult option to make happen; however, it would allow a more sizable monthly mortgage payment. This, in turn, generally increases the mortgage amount you can afford to borrow. You could also decide to jointly apply for the mortgage with your partner or get a co-signer to guarantee your mortgage.
Down Payment Options
Several down payment options can facilitate getting a mortgage as a student. Here are some practical ways you can explore:
Your personal savings account is an excellent source of funds needed to make a down payment on a house. This could be in the form of a regular bank account, mutual funds, an investment account, a tax-free savings account (TFSA), or GICs. The key thing is to ensure that the money is available when required.
It has become a commonplace activity for parents to help out their children make a down payment, and lenders also allow this provided it is given in the form of a gift. To legalize this exchange, the ‘gifter’ and ‘borrower’ would be required to put pen to paper and submit a one-page ‘gift letter’ that explicitly states that the funds were given as a gift and not a loan.
However, home buyers are not permitted to accept funds from any party with a direct vested interest in the sale of the property. Also, the seller is not permitted to provide the buyer with incentives unless the incentive is a home improvement such as a new roof or windows.
RRSPs can be accessed before retirement, and you can borrow against these funds to put down a payment for a home.
If you have some savings in an RRSP account, you’re allowed to access up to $35,000 as an individual or $70,000 as a couple to make a down payment on a home. The withdrawal is not taxed, provided the money has stayed in the account for at least 90 days. The terms of this loan allow for up to 15 years to pay back the borrowed funds into your RRSP account.
So, can someone with student debt get a home loan? Yes, you can. However, various factors play into this possibility as detailed in the article. As always, examine short and long-term implications on your finances before coming to a decision.
If it is the best call to begin a mortgage process right away, go for it. Otherwise, it would be smart to reconsider and bide your time until the odds are in your favor.
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