At 25, I had a brilliant idea to go back to school for public relations. Seven months and a $20,000 student loan later, I graduated with zero interest in practicing PR, an unpaid summer internship (required to graduate), followed by a humbling job search that dragged on for months. In an interview with my future boss, I was asked what my salary expectations were. “Minimum wage?” I said, and I think she laughed.
My story isn’t special. Every spring, graduates ditch their caps and gowns and step into the real world with an average of $16,727 in debt, according to the Canadian Federation of Students. It will take them around 14 years to pay off (based on the average entry-level salary of $39,523) — leading many to put off milestones like starting a family and buying property.
I’m currently saving for a downpayment on a cottage in Ontario — the inspiration behind our brand new newsletter all about the climb on and up the property ladder (sign up here!). To help me leap over the student loan hurdle to get to homeownership, I asked Lisa Okun, a Toronto-based mortgage agent, and Jessica Moorhouse, a Millennial money expert, for advice.
So, how much debt are Canadian students actually racking up?
In an era of rising interest rates and tougher lending rules, Canadians are facing high barriers to owning a home in major Canadian cities. Pair that with lingering student debt and it can feel near impossible.
As of 2016, 490,000 full-time students received a total of $2.7 billion in government-funded loans. Our parents used to be able to pay off their tuition — which averaged around $1,000 a year — with summer jobs. Today, the average tuition for a Canadian university — before the cost of books, travel and supplies — is $6,500 per year. It gets even more costly as you climb the education ladder — anywhere from $8,000 to $22,000 per year. According to Statistics Canada, in the past year alone, undergraduate tuition fees have already increased by 3.1 percent.
“Homeownership was the dream of the Baby Boomers. Now, Millennials are buying in at astronomical prices,” says Kelley Keehn, a personal finance educator and consumer advocate for FP Canada. “When their Baby Boomer parents came out of school, they had very little student loan debt and not as many people went to university. Either way, you were almost guaranteed a job. Now, it’s almost expected that you graduate with a degree and you’re still not going to get your dream job. It’s going to take a lot of time.”
Will student loan debt hurt my chances of qualifying for a mortgage?
The bad news: if you want to get into the property market with student debt it won’t be a walk in the park. The good news: it’s possible.
“You can carry debt and still qualify for a mortgage. Some people have this idea that you have to be debt-free before you can get a property. Generally speaking, I haven’t seen a lot of people who weren’t able to qualify for a mortgage because they were still carrying a student loan,” says Okun. “It’s more so an issue for people who are carrying a lot of credit card debt or have an unsecured line of credit — which I would tell them to pay off first.”
Compared to credit cards, student loans are one of the “better” debts to have. On top of having low-interest rates, relatively flexible repayment schedules and tax breaks, student loans are qualified less harshly by your mortgage lender.
How much debt do you have?
Lenders need to know that you can keep up with your mortgage. They get this assurance by looking at two key metrics: your debt-to-income ratio and your credit score.
It’s not whether you have a student loan, but rather, how much you have to pay back and how good you are at doing that.
“When we’re qualifying people for a mortgage, we look at any existing debts and how much income someone makes. You are not allowed to put more than 44 percent of your income towards total debt servicing. The more debt you’re carrying, the less mortgage you can get,” says Okun.
My relatively small student loan won’t knock me out of the game. Got a $100,000 line of credit to pay back? I’m sorry to say it, but you should probably grind that down first.
If you want to buy a place, stay on top of your student loan payments.
If you miss payments for 150 consecutive days for a provincial loan and 270 days for a national loan, your account will be deemed “delinquent.” Mean! This unfortunate name severely impacts your credit score — and your ability to qualify for a mortgage. But you can get back in good standing with six consecutive monthly payments and polishing off any outstanding interest and fees.
“If you’re making the payments on time — your credit score will be good because you’re showing that you’re responsible with credit. Which is really what it’s designed for — to demonstrate to lenders that you can carry debt responsibly,” says Okun.
Jessica Moorhouse encourages her clients to stay on top of their credit health. “Do you know your credit score? What does your credit history look like? Most of my clients have never looked until they approach a mortgage agent. Maybe you have too much credit, should be putting more money towards your debts, need a better repayment plan or there’s a missed payment you didn’t know about that’s really hurting your score.”
Photo: James Bombales
Should I put down less than 20 percent on a downpayment?
The reality is that most first-time homebuyers who are carrying debts won’t be able to scrape together enough cash for a downpayment over 20 percent. This means they will default to an insured mortgage and get dinged with hefty mortgage insurance premiums. For a while, I intended to avoid CMHC insurance like the plague (I can barely stomach ATM fees). But, I’ve since come around.
As I mentioned, it will take the average undergrad 14 years to pay off their loans. That’s a long time horizon to wait before jumping into the property market.
“Some people are just never going to have 20 percent to put down and they still want to buy a house. And I don’t think they should feel bad about that. At the end of the day, what they want is a home. If putting down less than 20 percent gets them into a place and it’s still affordable to them and they’re prepared for the mortgage payment, closing costs, property tax — they should just go for it. Because if you wait and wait, you may never get there,” says Okun.
Not sure if you can balance the debt with mortgage payments? Start tracking your spending.
When qualifying clients for a mortgage, Okun will share two figures: the maximum they can qualify for based on their debt-to-income ratio and the maximum they would actually be comfortable spending without ending up house poor. The best way to arrive at this figure is to track your spending.
“I recommend people speak to a financial planner to understand what they can really afford to still feel comfortable living their lives — can you go out, go on vacation occasionally, not worry when you’re at the grocery store? If people don’t have a sense of that, they have a little bit of work to do.” says Okun.
“I get my clients to create a budget for how they want to allocate their net income. Then they track their spending. It’s the only way to know what the real numbers are. Otherwise, you’re left guessing if you’re within budget or not,” says Moorhouse.
It doesn’t take that much time. Most of Moorhouse’s clients simply download their credit card and debit transactions into an excel spreadsheet and then categorize them to see exactly where their money is going.
“You’ll start to see where the problem areas are and where you can cut back without it really affecting you. Because most of the time people are overspending on stuff that doesn’t actually improve their quality of life,” she says.
Do you have recurring subscriptions you don’t use or a take-out habit that can be easily curbed? Shaving expenses like these off can easily raise a couple hundred dollars a month. “That’s significant when you’re saving up to pay down debt or buy a place in the future,” says Moorhouse.