For decades, the traditional path to homeownership has gone something like this: graduate from school, pay off your debt, start an emergency fund, begin saving for retirement, save for a down payment, and then buy a house. On top of that, never spend more than 35% of your net income on housing.
But the last twenty years or so have caused most Canadians to rewrite that script, putting buying a house ahead of debt freedom or even retirement. In particular, since the global pandemic began, the government eliminated the interest on federal student loans (even if provincial loans still accrue interest), and so there has been even less incentive to pay down low-interest debt. As a result, many Canadians have shifted their focus from debt freedom to trying to get into the hot housing market.
But what happens to their student debt? Can you apply for a mortgage if you have student debt? Does it impact your mortgage approval? The short answer is yes, you can get a mortgage with student debt, but it does affect your mortgage approval.
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Student Loans and Mortgage Affordability
The most significant way student loans will impact your mortgage is by affecting your mortgage affordability, which is how much you can borrow based on your current income, debt, and living expenses. The higher your mortgage affordability, the more expensive a home you can afford to purchase.
Mortgage affordability is calculated using two ratios, total debt service ratio and gross debt service ratio. These ratios consider your income, debt, and living expenses to determine how much house you can afford.
The first affordability rule is your gross debt service ratio, and this ratio won’t be affected by your student loans. The second affordability rule is the total debt service ratio. This ratio considers your housing costs, including mortgage principal and interest, taxes, and heating costs, along with your total monthly debt load. This total amount should not be more than 40% of your gross monthly income. Since this ratio takes your debt into account, your student loans will impact it. Here’s an example.
Let’s assume you and your partner earn a combined $110,000 per year with a $50,000 down payment. With today’s best mortgage interest rate of 1.65%, your maximum purchase price would be $520,475. However, if you add $700 in monthly student loan payments, your affordability drops to $491,268. The difference between paying off student loans, and carrying that debt, will impact your maximum affordability by $29,207.
This limitation applies to all debts, which means that if you have car loans or credit card debt in addition to student loan debt, your affordability will be impacted even further.
Credit Score and Mortgage Affordability
While your student loans will affect the price of the home you can afford, they’ll also indirectly impact your ability to get a mortgage because of how they affect your credit score. In Canada, student loans are a type of debt reportable to the major credit bureaus in Canada, Equifax, and Transunion. Therefore, if you’ve faithfully made payments on your student loan, they will positively impact your credit score.
On the other hand, if you haven’t made regular payments on your student loans or even been late to make your payments, your student loans will negatively impact your credit score. A lower credit score will hurt your chances of getting approved for a mortgage.
How to Get a Mortgage When You Have a Student Loan
While your student loan affects your ability to get a mortgage, you can still get one with student debt. Here’s what you should do if you’re considering applying for a mortgage with student debt.
- Pay off other debt: If you have other types of debt, even small amounts of credit card debt, it’s wise to pay those debts off, which will lower your total debt service ratio and improve your mortgage affordability.
- Make regular student loan payments: Making regular payments on your student loans will improve your credit score and help your chances of approval.
- Get pre-approved: If you aren’t sure whether you will be approved for a mortgage with student loans, you can apply for a pre-approval. This no-obligation mortgage application will pre-approve you for a set mortgage amount and mortgage interest rate.
Visit our student personal finance guide.
The bottom line
Ideally, when applying for a mortgage, you’ll have a great credit score, no debt, a long employment history, and a significant down payment. That said, life rarely unfolds perfectly, and you may find yourself applying for a mortgage while still carrying student debt. The good news is that you can get a mortgage with student loan debt, and as long as you are on solid financial footing otherwise, your student loan debt should not dramatically impact how much home you can afford.
If you plan on applying for a mortgage with student loan debt, you should make sure you have a good credit score, solid employment, and minimal other debt. These aspects will positively impact your mortgage approval and ensure your student loans don’t overly hinder your mortgage approval process.