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A study from Abacus Data* showed that as of August 2023, over half of Ontario graduates finished school with student debt and/or loans to pay for their education, and of that half, 53% are still working on repayment. $14,500 is the average amount of debt graduates carry, with five years being the anticipated amount of time needed to complete repayment.
Despite the stats, 75% of graduates noted they would like to become homeowners, ideally within the next five years. With the dream of owning a home comes the question, ‘Can I buy a home with student loan debt?’
What Does Your Debt Look Like?
How much do you currently owe on your student loans? What is the interest rate? You might still be able to get a mortgage with your student loan debt, but it doesn’t guarantee that you’ll be able to afford the additional expenses of home ownership. If you’re thinking about purchasing a home, start by keeping a record of your present expenses to determine where your money is going and what you can afford to buy while keeping up your existing standard of living.
Not every debt receives the same treatment. Consider all of your current debt with a critical eye. If you’re worried about having to make too many payments to various sources with different interest rates, look into debt stacking or debt consolidation solutions. One of the first constructive actions you can take in the direction of homeownership is to manage your current debt.
Can I Get a Mortgage With Student Loan Debt?
The short answer is, yes you can. Your mortgage affordability—the amount you can borrow based on your existing income, debt, and living expenses—is the main way that student loans will affect your mortgage. The more expensive a home you can afford to buy, the more affordable your mortgage is.
The total debt service ratio and the gross debt service ratio are the two ratios used to determine mortgage affordability. These ratios calculate how much housing you can buy based on your income, debt, and living expenses.
Your gross debt service ratio is the first rule of affordability, and your student loans have no bearing on it. The total debt service ratio is the second guideline of affordability. This ratio takes into account your entire monthly debt burden as well as your housing expenses, which include taxes, heating expenditures, and mortgage principal and interest. The overall sum should not exceed 40% of your monthly gross income. Student loans have an effect on this ratio because it accounts for your debt.
This restriction is applicable to all debts, so your affordability will be further impacted if you have credit card debt or auto loans in addition to student loan debt.
How to Get a Mortgage With Student Loan Debt
Student loans are one of several variables that are taken into consideration when evaluating a prospective mortgage borrower’s eligibility. Other loans, credit score, and employment history are other factors that will come into consideration when applying for mortgages, but here’s how to increase your chances.
- Pay off other debt: It’s a good idea to make the most progress toward paying off any additional debt you may have, aside from your student loans. Paying off credit card debt right away will increase your mortgage affordability, but even modest amounts of debt can have an impact on your debt-to-income ratio and your ability to obtain a mortgage.
- Make consistent payments on your student loans: Making sure that your payments are made on time and consistently is the best thing you can do when applying for a mortgage. By doing this, you will raise your credit score and increase your chances of being granted a mortgage.
- Reorganize the debt you took out for school: Monthly payments are used to calculate debt ratios. Restructuring your student loan to spread out payments over a longer time frame will lower your monthly payments and have a favorable effect on your debt ratios. But, once you’ve completed the home-buying process, strive to pay off your student loans as quickly as you can because the interest will increase over time.
- Apply for pre-approval: This is a good idea f you’re unsure if you’ll be able to obtain a mortgage while having outstanding student loan debt. You will then receive a fixed mortgage amount and fixed interest, so you’ll be able to determine what you can afford.
Consider Different Loan Types
Canada ranks better than our neighboring countries when it comes to mortgage affordability and payments, and since the Bank of Canada has announced three rate cuts this year, the overnight lending rate is much better than it was this time last year. However, mortgages may not be attainable for every post-grad, so look at the different home loans and mortgage types and see which one fits your situation best.
Down Payments and Debt Repayments
43% of Ontario residents who have post-secondary debt have an average of $10,000 saved for a down payment, while those who are not paying off debt typically have more saved.
It’s perfectly acceptable that a lot of first-time buyers find it unrealistic to save up to 20% for a down payment. Just be advised that making a smaller down payment than 20% may necessitate mortgage insurance, which will result in additional expenses. Considering that the cost of houses in Canada is still rising, it is probably a better idea to pay the mortgage insurance fees rather than wait years to pay off your loan and get into the real estate market later. It’s not impossible to fit a property into your budget if you plan ahead for any additional costs associated with making a smaller than 20% down payment.
Don’t sacrifice those minimum payments on your student debt in order to save for a down payment. Doing so will jeopardize your chances of getting approved for a loan. Making regular payments as decided upon in the loan agreement is essential for keeping a decent credit score. To ensure that you can save for a down payment and make your minimum student loan payments without becoming house-poor, it might be prudent to start tracking your spending and figuring out your debt-to-income ratio if you want to buy a home.
What Does Your Credit Score Look Like?
Your credit score is another big factor when applying for mortgages and home loans, and it can be directly impacted by your student loans. Finding out your credit score and keeping a close eye on it are major concerns for most people. After you’ve taken that step, you can try to make it better if needed. Generally speaking, your credit score will be higher if you have less debt. However, if you wish to apply for a mortgage, you are still able to carry debt.
Your credit score can increase if you make all of your student loan payments on schedule. Your credit may improve when you pay off your loan because you will have less debt overall. On the other hand, your credit score will probably suffer if you make late payments on your student loans.
What Else to Consider
It’s never too early to start planning for homeownership, but it can be tricky to decide where to start. Making a budget would be the first step in order to take a comprehensive look at all of your money coming in and going out. Do you have plans to save for a down payment and repay student loans? If not, ensure that your budget includes them as line items. To help you figure out how much money you need to set aside each month to reach your goals, start by mapping out your objectives and the timeframe you want to attain them. Keep in mind that it should be a reasonable sum that fits comfortably into your spending plan. Make a commitment to your goals after you’ve set aside a certain amount of money for them.
Your home-buying process may be slowed down by inflation, high living expenses, and student loans, but there are other options to think about that will help you come closer to becoming a homeowner. You might need to look into alternate sources of income if you feel that your monthly income is insufficient, particularly when attempting to pay off debt, cover essential expenses, and preserve money. A lot of young Canadians are working two jobs or doing side gigs. This additional revenue can support your down payment savings and expedite your efforts to repay your student loans.
As of 2024, nearly half of Canada’s population between the ages of twenty and twenty-nine still reside with at least one of their parents, whether out of preference, necessity, or both. Either way, living with family and (hopefully) paying less than market value rent allows you to save more, putting the extra money towards your debt or into savings for future down payments.
Another rising trend is buying a home with others. Co-ownership, or buying a home with another party, is an additional choice that is becoming more and more common among Canadians (typically a close family member or friend). With this option, prospective buyers can enter the real estate market sooner than they could if they did it alone. It also reduces the financial burden of owning a property because you can split monthly bills and any unforeseen expenses that may come up, as well as the need to save a larger down payment.
Living in an era where gas prices, housing costs, grocery costs, and other expenses are at an all-time high is difficult enough. Adding student loan debt to the mix makes things even more difficult. Your student debt does not have to be a barrier between you and owning a home. Your first aim should be to pay off your outstanding school debt because doing so will get you one step closer to becoming a home buyer. You may be proactive in paying off your student loan debt and saving for your home by adopting habits like monitoring your credit score, starting your savings journey early, cutting back on pleasures, and considering all of your options.
*study conducted on a sample of 1,500 Ontario post-graduate students, with varying age, lifestyles, and financial factors.
Are you looking to enter the real estate market this fall? Give us a call today! One of the experienced agents at Zoocasa will be more than happy to help you through the exciting home-buying process!
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