Can Students Get Mortgages in Canada?
Getting a mortgage as a student in Canada is technically possible, but comes with several challenges. While there are no legal restrictions against students obtaining mortgages, most mainstream lenders have strict eligibility criteria that can be difficult for students to meet.
However, with the right financial profile and preparation, some students may still qualify for a mortgage in Canada.
Also see:
Can International Students Get Home Loans in Canada? Explained
Student Loans for International Students in Canada: Guide & Eligibility
Can International Students Get Financial Aid in Canada? Explained
Do Canadian Banks Provide Loans to International Students? Explained
How Much Is a Student Loan in Canada? Funding Details
Overview of Mortgages in Canada
Let’s first understand what a mortgage is and how the mortgage market works in Canada.
A mortgage is essentially a loan taken to purchase property, usually a house. The property itself acts as collateral against the loan, meaning the lender can seize the property if you default on repayment.
In Canada, mortgages are offered by banks, credit unions, trust companies, and other private lenders. The most common type is a conventional mortgage backed by the government through Canada Mortgage and Housing Corporation (CMHC). The key eligibility criteria usually evaluated are:
- Income – Most lenders want your gross annual income to be higher than the mortgage payments by a certain ratio. This is known as the Gross Debt Service ratio (GDS).
- Existing debt obligations – Lenders will evaluate your Total Debt Service ratio (TDS), which measures all your existing debts alongside the potential mortgage. A lower TDS indicates you are less financially strained.
- Credit score – Having a high credit score (above 680) demonstrates your creditworthiness and indicates lower risk for lenders.
- Downpayment – You need a 20% downpayment for homes over $1 million, and at least 5% for lower priced homes.
Meeting these criteria provides assurance to the lender that you can service your mortgage debt reliably. Failing to meet one or more criteria does not necessarily mean a rejection, but it makes approval less likely.
Now let’s see why getting a mortgage as a student can be challenging.
Challenges for Students Seeking Mortgages
There are three primary obstacles students face when seeking mortgages in Canada:
1. Limited and Unstable Income
Lenders want to see consistent and sufficient income over a period of time to ensure mortgage payments will be met. However, student incomes tend to be lower, and often fluctuate.
- Most students only work part-time and earn less than full-time employees. Average student income from part-time work may range from $500 to $2000 monthly.
- Income from co-ops, summer jobs, research stipends etc. varies over time rather than being stable.
- Parents may support students financially, but lenders may not accept gifts or allowances as income unless legally binding.
These factors make it harder for students to meet the minimum income requirements of mainstream lenders, as well as the GDS and TDS ratios. Having a side hustle, business, or investments with steady cashflows can help somewhat.
2. High Existing Debt from Student Loans
Carrying student loan debt decreases your chances of mortgage approval in two ways:
- It directly increases your TDS ratio, making you seem riskier. Average Canadian student debt is $28,000, with monthly payments around $300.
- It indirectly lowers the maximum mortgage amount you can get approved for. Lenders avoid over-extending your repayment capacity.
Debt repayment history can help counterbalance this weakness. If you have diligently repaid any credit card debts or previous loans, it can demonstrate financial discipline.
3. Short or Non-Existent Credit History
Lenders prefer seeing a longer credit history with proper management – typically at least 3 years. However, students are unlikely to have an extensive credit background.
Some key disadvantages include:
- Not having any major credits like a previous mortgage or auto loan.
- Little credit card history due to recent entry into workforce.
- High utilization ratios if credit limits are low initially.
- Authorized user status on parent cards not considered equivalent.
- Poor score if mistakes were made with early credit usage.
Building credit requires proactive planning. Steps like becoming an authorized user, limiting hard checks, and maintaining low utilization help.
Alternative Mortgage Options for Students
The challenges are not insurmountable, however. With the right approach, some financing options are still available to students in Canada.
1. Using a Co-signer
One of the strongest alternatives is having a co-signer with better financial credentials co-apply for the mortgage. Parents often co-sign student loans, and can similarly back your mortgage application.
Benefits of co-signers:
- Their income can supplement yours to meet eligibility criteria.
- Their credit score and history enhances the application.
- Makes your DTSratios seem lower.
- Allows tapping into home equity if they are homeowners.
Co-signers must be aware of the risks like impact on their debt obligations and credit scores. Buyer’s legal counsel can draft an agreement to protect the co-signer’s interest in the property.
2. Opting for Alternative/Private Lenders
Alternative lenders operate outside mainstream channels and are more flexible with non-traditional borrowers like students. But this comes at a premium:
- Mortgage Investment Corporations pool funds from individual investors, and lend under less rigid criteria. However, their interest rates are higher – commonly around 8-12%.
- Private lenders like credit unions, friends/family, and private companies may also fund mortgages if convinced of repayment assurance. But the loan terms may be variable.
- Peer-to-peer lending platforms like LendingArch can match students with private lenders. Interest rates can be over 10%, but offers more options.
The easier approvals come with higher costs. But they provide access to mortgages which might otherwise be out of reach.
3. Leveraging Other Assets
Besides income and credit, some alternative assets can also support a mortgage application:
- Down payment gifts from parents/relatives are sometimes accepted. Must be well-documented as non-repayable.
- Cryptocurrency holdings can show financial capacity provided you cash out to regular currency.
- Foreign assets like properties abroad may also be considered by some lenders.
- If receiving inheritance, documentation of upcoming funds may help.
- Having an existing home equity fund – even if not fully owned yet – opens more doors too.
Proper documentation is key. Non-traditional assets require greater due diligence as lenders will scrutinize them closely.
Strategizing and Preparing as a Student
Mortgages don’t happen instantly – careful planning and preparation is key:
- Start building your credit profile actively even before you need a mortgage. Consider credits with lower barriers to entry like retail cards.
- If borrowing student loans, pay down high-interest debts aggressively. Follow prudent payment discipline as lenders will pull your borrowing history.
- Save for a downpayment. Come up with a savings plan – use windfalls wisely. Lenders favor larger downpayments, with 20% being ideal.
- Find co-signers early. Discuss with parents/relatives and see if they can co-apply when the time comes. Get professional advice on protecting co-signers.
- Explore alternative programs. Many regions have special schemes to help first-time buyers or professionals like teachers, doctors etc. Research them.
- Consult brokers/advisors. An experienced broker can suggest lenders open to non-traditional applicants. Advisors can review your situation and offer tips to improve your mortgage readiness.
With some foresight, a student can develop their financial profile to increase mortgage possibilities after graduation.
Frequently Asked Questions
1. Is being a student itself a barrier to getting a mortgage in Canada?
No, there are no legal rules prohibiting students from being offered mortgages. Lenders mainly assess your financial situation. However, students frequently struggle to meet the income, credit, and downpayment requirements.
2. What’s better for students – fixed or variable rate mortgages?
Variable rate mortgages have lower interest costs initially. But fixed rates provide stability and are easier to budget for. Students often prefer variable rates for the savings, but should also consider the risks of volatile interest rate hikes.
3. How can students build their credit score while still in school?
Apply for starter credits like student cards or low-limit retail store cards. Keep utilization under 30%, make all payments on time, and keep hard checks low. Become an authorized user on a parent’s well-managed card.
4. Are mortgages the only option? What about renting?
Renting is typically better suited until students gain financial stability. However, other options like co-purchasing with family or buying as investments through partnerships may also be feasible. Consider all options before committing to home ownership.
5. How soon after graduation should students buy instead of renting?
There’s no fixed timeline, but at least 2 years of stable full-time income is recommended. Rushing into home ownership could jeopardize financial health. Build savings, pay down debts, and let your career (and income) consolidate first before considering major loans.
6. Where can students educate themselves more about mortgages in Canada?
Helpful resources:
- Government of Canada Guide to Mortgages
- Canadian Mortgage and Housing Corporation First Time Homebuyer Guide
- Financial Consumer Agency of Canada guide to mortgage shopping
- Mortgage brokers associations in your province
Also talk to advisors at your bank or qualified financial planners.
7. What alternatives exist for financing a home purchase besides mortgages?
Some options:
- Family gifts or loans
- Personal loans from banks
- Cashing out investments
- Peer-to-peer lending
- Reverse mortgages (available for seniors/retirees)
- Rent-to-own types of arrangements
- Saving up to buy in full with cash
Each option has its own pros/cons. Seek professional guidance on evaluating the best one for your needs.
Conclusion
Getting a mortgage as a student is challenging but not impossible in Canada. Conventional lenders have strict criteria that students may struggle to meet fully. However, options exist such as co-signing arrangements, private lenders, leveraging other assets, and proper preparation. With prudent planning and advice, financing a property purchase while still in school can become feasible for some determined buyers. But also carefully consider if renting or other alternatives are better suited until you gain more financial stability later in your career.
References
- Government of Canada Guide to Mortgages and Mortgage Options. https://www.canada.ca/en/financial-consumer-agency/services/mortgages.html
- Lofts, Kenneth. A Guide for Students Buying a House in Canada. RateHub.ca. https://www.ratehub.ca/blog/a-guide-for-students-buying-a-house-in-canada/
- Brennan, Alex. Can you qualify for a mortgage as a student? Savings.com. https://www.savings.com/mortgages/can-you-qualify-for-a-mortgage-as-a-student
- Canadian Mortgage and Housing Corporation. First Time Homebuyer Guide. https://www.cmhc-schl.gc.ca/en/consumers/home-buying/first-time-home-buyer-incentive/prepare-buy-first-home/first-time-home-buyer-incentive-prepare-buy-first-home
- Blanchette, Marc. Getting a Mortgage as a Student in Canada. MapleLoans. https://www.mapleloans.com/blog/getting-a-mortgage-as-a-student-in-canada/
- LendingArch – Peer to Peer Lending in Canada. https://lendingarch.com