Do Student Loans Affect Your Mortgage in Canada?

Do Student Loans Affect Your Mortgage in Canada?

1.7 million Canadians have student loan debt. While student loans are a highly-regulated type of debt, they are still debt.

Many students in Canada are concerned about the impact of student loans on their future financial prospects, including their ability to buy a home. The good news is that having student loans does not mean that you will be unable to get a mortgage.

However, it is important to understand how your student loans may affect your mortgage application and what steps you can take to improve your chances of being approved.

Can You Get a Mortgage With Student Loan Debt?

It is possible to get a mortgage with student loan debt.

That said, you will likely be approved for a smaller mortgage amount than someone without student loan debt. This is for 2 main reasons:

Your debt-to-income ratio will be higher because of the student loan debt.

Saving for a down payment could be more difficult because of the required monthly installments to pay off your student loan.

How Do Student Loans Affect Your Mortgage?

Debt to Income Ratio

When you apply for a mortgage, lenders will look at your debt-to-income ratio (DTI). This is the ratio of your monthly debt payments to your monthly income.

Student loan payments are included in your monthly debt payments, so having a large student loan payment can increase your DTI and make it harder to qualify for a mortgage. Most lenders prefer a DTI of 44% or lower.

If your DTI is higher than that, you may have trouble getting approved for a mortgage. However, some lenders may be willing to work with borrowers who have higher DTIs if you have at least a 20% down payment and an overall strong application.

GDS & TDS Ratios

Gross Debt Service (GDS) and Total Debt Service (TDS) ratios are two important metrics used by lenders to determine whether a borrower can afford to take on a mortgage. GDS is calculated by dividing a borrower's monthly housing costs by their gross monthly income.

Lenders typically want to see a GDS ratio of less than 39%. This includes mortgage payments, property taxes, heating costs, and 50% of condo fees (if applicable).

TDS, on the other hand, includes all of the expenses in GDS plus other debts, such as car loans, credit card payments, and student loans.

The TDS ratio is calculated by dividing a borrower's total monthly debt payments by their gross monthly income. Lenders typically want to see a TDS ratio of no more than 44%.

Credit Score

Your credit score is another important factor in mortgage eligibility. Student loans can affect your credit score in a few different ways:

• Payment history: Late or missed payments on your student loans can lower your credit score.
• Debt utilization: The amount of debt you owe compared to your available credit can also affect your credit score. If you have a high student loan balance, it can increase your debt utilization and lower your score.
• Credit history length: Student loans can also help you build a positive credit history if you make your payments on time and keep your balance low.

If you have a low credit score, it can be harder to get approved for a mortgage or you may have to pay a higher interest rate. However, having a high credit score can help offset the impact of a high DTI or a large student loan balance if you also have a 20% down payment.

How To Get a Mortgage if You Have Student Loans

Pay Off Student Loans

One of the best ways to improve mortgage eligibility with student loans is to repay them as soon as possible.

This will not only reduce the amount of debt you have, but it will also improve your credit score. Lenders look at your credit score to determine your creditworthiness, and a higher score can lead to better interest rates and loan terms.

If paying of your student loans in full isn't an option, (and for many it definitely isn't), then you should work to try to minimize the monthly payments on those loans. Government student loans typically have minimum payment that equate to about 1% of the balance.

If you're payment is higher than that you may be eligible for a payment decrease. Connect directly with Student Loans Canada to assess your eligibility.

If you have student lines of credit, lenders require that mortgage brokers use 3% of the balance of these lines as your minimum payment.
If you have a high balance, this can mean a very high payment and it can greatly decrease your ability to borrow for a mortgage.

For example, a $50,000 student line of credit requires mortgage brokers to debt service a payment of $1500/month. This reduces your borrowing power for a mortgage by about $150,000.

Refinancing a line of credit into a term loan and lowering your monthly obligation to $500/month would increase your mortgage eligibility by $100,000.

Increase Income

If you have student loans and are struggling to qualify for a mortgage, increasing your income can help. Lenders look at your debt-to-income ratio when determining your eligibility for a mortgage, and a higher income would help offset your student loan debt. This would typically be done by adding a strong income-earning co-signer to the file like a parent, sibling or grand-parent.

While this is easier said than done, you can look into a part-time job, working overtime, or asking for a raise at your current job. Nothing ventured, nothing gained!

Pay Off Other Debt

In addition to repaying your student loans and increasing your income, you can also improve your mortgage eligibility by reducing your overall debt levels. This includes credit card debt, car loans, and any other loans you may have.

Lenders look at your debt-to-income ratio, which is the amount of debt you have compared to your income. Lowering the overall levels of unsecured or secured debts that you need to pay each month increases the amount of money that you can borrow to purchase a home.

If you're managing balances on several credit cards and lines of credit, you may want to consider consolidating your debt into one loan with a lower interest rate. This can make it easier to manage your payments and reduce your overall debt.

When considering a consolidation loan, you want to make sure that the blended interest rate is lower than the average interest rate that you're paying across the separate loans. In almost all cases, a consolidation loan will be a lower interest rate than your credit cards.

Repayment Assistance Programs

If you are struggling with student loan debt, there are options available to help you manage your payments.

The Government of Canada offers repayment assistance programs, such as the Repayment Assistance Plan (RAP) and the Canada Student Loan Forgiveness for Family Doctors and Nurses program, which can help reduce your monthly payments and overall debt burden.

It is important to reach out for help before you start missing payments. Missing student loan payments has a very negative affect on your credit score.

First-Time Home Buyer Assistance

If you’re a first-time home buyer, there are a few options that can help with your down payment, even if you have student loans.

Some first-time home buyer options to look into include:

• First-Time Home Buyer’s Savings Account (FHSA)
• Registered Retirement Savings Plan (RRSP) Home Buyers Plan
• First-Time Home Buyer Incentive

Get the Right Mortgage Advice

Overall, while student loans can impact your mortgage eligibility, they do not necessarily have to be a barrier to homeownership. Talk to a mortgage broker to explore your mortgage options, even if you have student loan debt.

For more information about whether you can get a mortgage with student loan debt, contact the mortgage brokers at Spire Mortgage for personalized advice.