If you dream of homeownership but are saddled with debt, you might find yourself wondering: what comes first — the chicken or the egg? Should you pay off the student loan, Visa bills, car payments, *insert your outstanding debt of choice here*, or get into the property market — while you can? There’s a sense of urgency for many homebuyers — to lock in low interest rates and take the plunge before home prices rise. Is it now or never?

“I hate to say it depends — but — it depends,” says Kelley Keehn, personal finance educator and consumer advocate for FP Canada. “Should you work out at the gym or count your calories?”

Managing a mortgage payment alongside debts can be manageable for one person and leave another person house poor without any retirement savings in sight. Many people buy homes when they’re carrying debt. But whether or not they should, depends on a few factors.

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What kind of debt do you have?

Not all debts are created equal. There are “good” debts — like student loans that often come with interest rates under five percent, flexible repayment options and tax-deductions. And then there’s the bad debt — high-interest credit cards, for example, that charge 18 percent or more in interest.

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“It’s important to look at what kind of debt you have,” says Keehn. “If all of your debt is manageable, like a low-interest line of credit or you have a low rate on your student loan, it’s a little fuzzy. It’s a tougher one.”

She says any financial planner would likely tell you to kill the high-interest debts first, before taking on a mortgage. “Are you setting yourself up for failure by saving for the downpayment, which is great, but meanwhile, compound interest is ticking away in the credit card companies favour with 20, 25, 29 percent interest rates. It can be hard to get ahead,” she says.

Photo: James Bombales

Will your debt keep you from qualifying for a loan?

Then, there’s the question of how much you actually owe. If you’re on track to pay off your student loan in a few years and have never missed a payment, that’s one thing. If you’re a recent law school grad carrying $78,000 in a line of credit, that’s another. The larger the debt load, the higher your monthly payments will be — and lenders look at the total amount to calculate the maximum loan they’re willing to give you for a property.

Along with giving lenders some peace of mind, your Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS) will also help you determine if you can keep up with your debts and housing costs, simultaneously.

Gross debt service ratio (GDS): Lenders use your GDS to determine what portion of your income will go towards the house each month. This includes the annual mortgage payments, property taxes, heating costs and if you live in a condo, 50 percent of the condo fees. The lender will then add that up and divide it by your gross annual income. If you come in under 32 percent, you qualify for the loan.

Total debt service ratio (TDS): Your TDS is very similar but on top of the mortgage, property tax, heating costs and half of your condo fees (if applicable), they add any other debts you carry — including credit cards, lines of credit, student loans etc. They divide the total by your gross annual income and if it comes in under 40 percent, you get approved for a mortgage. If you have fabulous credit and a reliable income, the TDS can be pushed to 44 percent. A credit score of 700 or over will also show your lender you can handle the payments.

But keep in mind, the amount a lender is willing to loan you is not necessarily the amount you should take. “You have to take it further and really think about what else you want to do in your life. No disrespect to banks, but they’re in business to get you that mortgage,” says Keehn.

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Will you be able to keep up with your debts and mortgage payments?

Octavia Ramirez, the founder of Paper & Coin — a financial coaching company that helps Millennials reach their personal finance goals — takes a conservative approach when it comes to a comfortable debt-servicing ratio. “I teach my clients to have zero non-housing related debt. And, your total debt service ratio shouldn’t be more than 30-35 percent of your gross income, so that is a good gauge of how much of your money is going towards things like a mortgage, plus other debts.”

A recent study by MNP Consumer Debt revealed that nearly half of Canadians will not be able to cover all living and family expenses in the next year without going into more debt. The proportion of Canadians who are $200 or less away from month-end financial insolvency jumped a significant six points since September of this year, showing the trend is on the rise.

“They’ve been doing this survey for a number of years and keep coming back with the same results. So that begs the question, or reveals the answer, that Canadians do not have adequate savings,” says Keehn.

Photo: James Bombales

On top of paying off debt, are you taking care of future you?

Will strapping yourself to a downpayment alongside debt cripple your ability to accumulate long-term wealth for retirement? Many first-time homebuyers are faced with a choice — save for a downpayment, pay off their debts or put money aside for retirement. They’re in a position where they can accomplish one or two, but not all.

Ramirez recognizes the power of time and compounding growth to set you up for retirement. “I’m very conservative when it comes to these things,” she says. “I’d love for people to be putting at least 15-20 percent into their investment accounts. That probably sounds high, but that is a great benchmark for building long-term wealth. But, the truth is many Millennials aren’t putting anything into investment, so even if you put a fraction of that amount in, you’re on to a great start.”

Starting early and saving a relatively small amount each week can have a dramatic impact on your ability to meet your retirement goals. Postponing savings to get into the housing market will stunt your investment’s growth potential long-term.

“The financial planning standards council did a report last year on seniors and money and found that 35 percent of seniors 85 and older had debt. Not just mortgage debt but credit card debt, car loans and more. It’s crazy,” says Keehn.

Taking care of future you also means putting money aside as an emergency fund — a recommended three to six months of expenses. “Remember, you’re a homeowner, now. If the condo fund isn’t sufficient, you’re on the hook — there is no landlord to bail you out. You have to have those emergency savings. If you’re self-employed or your spouse is in a worrisome industry, or you have any other red flags with repaying your debt, it can turn into a scary scenario,” says Keehn.

Photo: James Bombales

Where are you planning to buy?

Many first-time homebuyers can’t shake the dream homeownership, and for good reason. There are ample arguments in favour of buying a place before you crush your debts. In some markets, owning a home can be less expensive than renting and there’s also the emotional well-being that comes from investing in something that belongs to you. “I bought a home really young and I’ve always been a fan of homeownership,” says Keehn. “The forced savings are very attractive. And having something that’s your own.”

Where are you planning to buy? Whether it makes sense to save for a downpayment or pay off your debts will vary greatly depending on where you live. The Toronto market, for example, is growing each year at a higher rate than the interest on your debt. To avoid being priced out all together, it might make sense to get in while you can. In cooler markets, taking the time to pay off your debts before saving for a downpayment could be the safest choice.

“It may be hot right now, but you don’t know if it’s going to be hot later,” says Keehn. “Calgary was so envied just a few years ago. Some Calgarians I know had to move back because they couldn’t sell their homes…Now I know this is an unusual market that is much more cyclical than Toronto or Vancouver, but you don’t buy a principal residence with the hope of making a bunch of money.”

Photo: James Bombales

How badly do you want that house and how do you feel about debt?

Keehn recommends speaking to a fee-only financial advisor to see the bigger picture. “They’re going to help you understand what your wants and goals and dreams are. Are you foregoing all of them for homeownership or is homeownership the ultimate dream and you’re willing to forego the other stuff?”

You can scrape by with a five percent downpayment, debt and no emergency savings, but if the thought makes your queasy, build a buffer. “The takeaway is that you’re going to have to make some severe sacrifices and be house poor. You don’t want to be that person that’s sitting on boxes and using one frying pan forever because you don’t have money to furnish the place,” says Keehn.

“It’s painful to see the money going down, going down, going down every month [because of rent] just because I’m looking for the perfect job,” she says. “It will come, but it’s going to take time.”

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