Canadians face substantial obstacles to home ownership in the country’s largest cities due to soaring interest rates and stringent lending regulations. Potential homebuyers struggling to save money for a down payment after graduation find their goals nearly unattainable. It is especially true if they also have an ongoing student loan debt. this blog discusses all you need to know to boost your chances of securing a mortgage with Canada student loan.
Navigating Mortgage Possibilities With a Student Loan Debt
According to a 2017 report by the Canadian Federation of Students, 1.7 million student Canadian graduates stepped out into the working world with an average debt of $18.2 billion- and this figure continues to rise. It will take those graduates approximately 14 years to settle their debt based on standard entry-level incomes, stalling milestones like home ownership. With Canadian students’ average tuition fee at an all-time high, the longer you pursue your education, and the higher up the ladder you go, the more it will cost you in due course.
If you, like many Canadian students, are anxious about how your future financial prospects, especially your capacity to purchase a home, would be impacted by Canada student loan, here’s some good news. Canada Student loan do not preclude you from being able to obtain a mortgage. Comprehending how your student debts could influence your mortgage application and undertaking approaches to enhance your acceptance prospects is critical.
Impact of Canada Student Loan on Mortgage Eligibility
You can carry debt and still be eligible for a mortgage. However, it can affect your mortgage application by impacting your mortgage affordability, which is the maximum amount you are permitted to borrow, given your current income, debt, and living expenditure. You will probably be granted a smaller mortgage than a borrower without student loan debt, primarily for two reasons-
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- Canada student loan debt could result in a higher debt-to-income ratio.
- The required monthly loan instalments could make saving for a down payment challenging.
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Debt-to-Income Ratio
Lenders consider several metrics when qualifying individuals for a mortgage in Canada to determine whether or not to accept an applicant and ascertain their borrowing risk. The debt-to-income ratio illustrates how much of your gross monthly revenue goes toward making monthly payments on your existing debt by representing your debt as a percentage of your income.
This ratio essentially measures how well you can manage your existing debt obligations depending on your income to determine how much you are qualified to borrow from the lending organization. Your DTI ratio increases as you accumulate more debt or with a decline in your income. A student loan is accounted for while calculating this percentage since it contributes to your total debt.
Mortgages are more likely to be approved for prospective borrowers with a low DTI ratio (44% or less), indicating sufficient income and a healthy balance between income and debt, making them low-risk borrowers.
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GDS and TDS Ratios
A lender examines two important debt ratios to assess whether it is appropriate for a borrower to take on a student loan mortgage. Calculated by dividing a borrower’s monthly housing costs by their total monthly income. The gross debt service ratio illustrates the ratio between your housing expenses and your gross income. Your housing mortgage principal and interest payments, with monthly property taxes, half of your condo fee, heating bills, and other housing-related fees, are considered housing costs. Lenders typically prefer a GDS ratio of under 39%. Student loans generally have no impact on the GDS ratio.
In addition to the housing costs included in GDS, your total debt service (TDS) ratio also accounts for any additional monthly debt payments, including those for credit card bills, car loans, line of credit payments, and more. Most lenders will not approve a mortgage in Canada with a TDS greater than 44%. A student loan will impact this ratio since it considers your debt load.
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Credit Score
The credit score is a crucial consideration while analysing an individual’s mortgage eligibility and evaluating the strength of a mortgage application. A credit score is a number within 300-900 allotted to you based on the repayment history of your credit facilities, including credit cards, auto loans and lines of credit extended to you. When applying for a mortgage in Canada, the quality of your credit score and accompanying credit reports indicate your creditworthiness or the risk you represent to potential lenders.
The higher your credit score, the stronger the possibility of you securing a mortgage. Even with substantial student loan debt, you can maintain high numbers and boost your chances of getting approved for a mortgage, provided you diligently make timely payments, keep credit card and other debts to a minimum and achieve a decent credit mix in your portfolio. Your student loans indirectly impact your ability to obtain a mortgage by influencing your credit score.
Strategies for Obtaining a Mortgage While Managing Existing Loans
Some steps you can take to mitigate the effect of student loans in Canada on your mortgage application include the following:
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Break Free From Student Debt
A mortgage is a debt, much like student loans, and your lenders will not approve more debt than you can afford. A conventional approach to improve mortgage eligibility would be to repay student loans at the earliest, to shed off your debt load and raise your credit score. Student loan debt can hinder your chances of obtaining a higher mortgage by severely impacting your credit score.
Responsible credit behaviour and payments towards your outstanding student loan debt on schedule will positively impact your credit score and place you at an advantage by increasing your prospects of meeting the eligibility criteria and mortgage approval upon application.
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Boost Your Earnings
When establishing your mortgage eligibility, lenders consider your debt-to-income ratio, and increasing your income is likely to help balance your student loan burden. It is often accomplished by including a co-signer with significant earnings to the application, such as a sibling, a parent or a grandparent who legally assumes liability to pay off the debt if you fail to make payments. Consequently, if you lack in some respects, such as a high credit score or a low debt-to-income ratio, a co-signer might provide your lender additional security until you can pay off your student loan. Alternatively, working overtime, getting a raise at your present job or taking on a part-time job can make a big difference.
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Clearing All Other Debt
Carrying a lot of debt overall can disturb your credit score and your ability to get approved for a mortgage at a reasonable interest rate. Consider combining your debt into a single loan with a more affordable interest rate if you manage balances on multiple credit cards and lines of credit. It can ease payment management while helping you clear off more of your total debt. Before consolidating them, you should verify that the interest rate on a consolidation loan is less than the average interest rate on your existing loans.
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Repayment Assistance Programs
The Repayment Assistance Plan (RAP) and the Canada Student Loan Forgiveness for Family Doctors and Nurses programs, each provided by the Canadian government, are valuable resources that aim to significantly reduce your monthly payments and the total debt amount you owe.
Options For First-Time Home Buyers
A few choices are available to first-time homebuyers, even those with college loans, to assist with their down payment. These include the following:
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- First-Time Home Buyer’s Savings Account (FHSA)
- Registered Retirement Savings Plan (RRSP) Plan for Home Buyers
- Mortgage Incentives for First-Time Buyers
Obtain Reliable Mortgage Advice
Ultimately, although student loans may affect your capacity to obtain a mortgage, they do not always hinder homeownership. It is advisable to consult with a mortgage professional or financial advisor for personalised guidance according to your specific requirements.
Wrapping Up
Ideally, you must have a decent credit score, strong financial footing, and minimal additional debt if you apply for a mortgage with student loan debt. Make sure to be consistent in your payment history because consistency is valuable to lenders. The more debt you carry, the less likely you are to satisfy mortgage qualification requirements since a hefty student loan payment can increase your DTI and make it challenging to qualify for a mortgage.
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Frequently Asked Question (FAQs)
Lenders consider elements including debt-to-income ratio, credit score, and the amount still owed on their student loans to assess the borrower's capacity to make mortgage payments.
Focus on improving your credit score by paying bills on time, lowering your debt-to-income ratio by paying off other debts, and providing a solid employment history to demonstrate stability and earning potential.
Higher student loan debt may result in a heavier debt load, impacting your loan approval and the amount you can borrow for a mortgage.
Lenders evaluate the DTI ratio to determine if you can manage additional debt. A lower ratio increases your chances of securing a mortgage with favourable terms.
Consider making a budget that assigns a portion of your salary to both goals each month to balance paying off your student loans and saving for a down payment on a home. How do lenders assess the impact of student loans on mortgage applications?
How can I improve my chances of getting a mortgage if I have student loans?
How does the size of my student loan debt affect my ability to get a mortgage?
How does my income-to-debt ratio impact my ability to get a mortgage?
How can I balance paying off my student loans with saving for a down payment on a home?
