By Geoff Kirbyson
Perhaps the last thing on your mind when applying for a student loan is how it will impact your ability to get a mortgage.
After all, when you’re in university, you’re probably living at home, working part-time and have next-to-no obligations. Buying a house is the furthest thing from your mind because it could be, like, FIVE YEARS down the road.
But every form of debt that you take on, whether it’s a credit card, a car loan or a line of credit, has an impact when you finally want to move out of your parents’ basement. (Or when your parents make the decision for you.)
“Your lender looks at your debt load and your student loan would be part of it. [It all] affects how much money you can borrow,” said Chris Dudeck, president of WinnipegREALTORS®.
If you’re still living at home after you’ve graduated or even living in an apartment, Dudeck recommends paying off your student loan as quickly as you can.
“It’s like any other liability or debt. Pay it off so it doesn’t affect some of your housing goals so you can move on and purchase more house than you would have been able to with that loan. If you don’t have your student loan on the books, you’ll be able to qualify for a higher purchase price,” he said.
When buying a home, your bank or credit union will calculate your debt-to-income ratio by adding up your monthly payments, along with your expected mortgage obligations and divide the total by your monthly income. In order to qualify for a mortgage with most providers, your debt-to-income level will need to be less than 43 per cent. When applying for a pre-approval, lenders will look at your income, assets, credit profile and employment.
Most would-be homeowners select their dream home first and then go to their financial institution or a mortgage broker to see what they can afford. Some experts recommend reversing the process — get pre-approved first so then you’ll know how much home you can afford when you’re going to open houses.
If a financial institution wants to keep your business long term, they should be giving you advice on how your student loan can affect you in the future, said Ernesto Ferritto, Winnipeg-based area sales manager at CIBC.
Would-be homebuyers need to qualify at the qualifying rate, which is set out by the Bank of Canada. It’s currently sitting at 5.34 per cent, which is more than one per cent higher than most five-year fixed rate mortgages.
The rationale for setting a higher threshold, however, is to prevent people from getting in over their heads in a rising interest rate environment.
“If you’re looking for a new mortgage, you qualify under a higher interest rate so if interest rates do go up when you’re renewing, you’re not in a position where you can’t afford the payments. Your actual payment is less than the qualifying rate pretty much on all of the terms,” he said.
If your student loan is standing in your way of buying the home you want, all isn’t lost. If you’ve got numerous loans, including credit card debt, ask your bank or credit union about consolidating them all into one, which can reduce the overall cost and your debt-to-income level. If you’ve got some collateral, you can often get a lower rate than the one you got on your original student loan.
Another option is to choose a longer mortgage term, which will provide a longer window in which to pay off the mortgage thereby reducing your month-to-month costs.