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(JONATHAN HAYWARD/THE CANADIAN PRESS)
(JONATHAN HAYWARD/THE CANADIAN PRESS)

PERSONAL FINANCE

Pay off student loan or save for a down payment? Add to ...

We live in historic times – at least in terms of skyrocketing student debt and house prices. Today’s young adults are crunched in an inordinate number of ways.

Last year the Canadian Federation of Students announced that “today’s students are the most indebted generation in Canadian history,” graduating with an average of $28,000 owed. The average Canadian home price, meanwhile, jumped to $503,301 in June, according to the Canadian Real Estate Association, and much higher in hot markets such as Toronto and Vancouver.

For someone new to the work force, these can feel like two competing goals. Should you pay off those loans or jump into the housing market before it’s too late?

The Globe and Mail posed this question to four financial experts, along with the assumption that the person in question is a few years into a stable career, has loans of $25,000 and lives in Ontario.

Bridget Eastgaard, author of the millennial finance blog Money After Graduation, Calgary

For student loans, $25,000 seems like a lot, but the person’s monthly payment is probably only about $250 a month. As long as they’re comfortable paying that on the salary they have, they don’t necessarily have to delay home ownership if it’s really important to them. Of course, I’m assuming they’re making $50,000 to $60,000 a year and are comfortable with both student loans and a mortgage.

I’m a big fan of the First Time Home Buyers’ Plan. If the money is for a home and they’re planning to buy it within two years, the funds should all be held in cash or guaranteed investment certificates. If it’s longer than two years, really safe mutual funds, and if you’re taking more than five years then you can go into the stock market. But I don’t know anyone in their 20s who wants to wait more than five years, because they’re worried houses will be worth $2-million. That’s actually a sign you probably shouldn’t buy into the market at all, but no one wants to hear that.

The real problem with the Home Buyers’ Plan, at the end of the day, is it’s only up to $25,000. That doesn’t go very far if the average house in Canada is worth over half a million. At the end of the day, you’re probably going to use a registered retirement savings plan plus other savings.

Jamie Golombek, managing director, Canadian Imperial Bank of Commerce wealth strategies group, Toronto

The most important thing to look at is the interest rate on the loan. If it’s an official Canada Student Loan or a provincial loan, the interest is eligible for a tax credit, which reduces the effective rate. It comes down to whether you believe the rate of return you’ll get on your investment will exceed the interest you’ll pay on the loan, adjusting for any tax breaks you have.

The other thing you’d look at is the number of years before you need to buy your home, as well as the budget for the home. In most cases, it makes sense to pay off student debt. You need to look at the after-tax cost of borrowing for your student loan versus the cost of financing the home.

We have some very expensive real estate in both Toronto and Vancouver. It’s impossible to predict prices going forward, but we’re at historic highs, and in many cases renting might be the way to go. For millennials, when you’re buying your first place, you’re not sure what’s going to happen – you might meet someone and decide to start a family, and these are reasons to get a larger place. It all comes down to doing your homework and deciding whether you want to jump in right away or wait a few years to save. And in some ways you might be further ahead by paying off student debt, and paying the interest on that.

Robb Engen, fee-only financial adviser and personal-finance blogger at Boomer & Echo, Lethbridge, Alta.

I think it’s important to build assets alongside your debt, as long as the debt is not of the high-interest variety like credit cards. For one, it builds the habit of saving. I wouldn’t rush super fast to pay student loans. If that’s the only debt you’re carrying, I would be careful about putting every single payment toward it. My advice would be to pay a little bit above your minimum required payment, but don’t break your budget trying to repay it in two to three years when you have so many unknowns in your life and you need to potentially save for a car, a wedding, down payments, whatever. You want to be able to build those habits and save for short-term financial needs.

If you’re looking at Toronto, or a housing or condo market where prices start at $400,000-plus, I would seriously consider renting, continuing to save for those short-term goals, paying off those loans at a higher clip, and weighing your options. A potential housing crash could happen, and if you’re sitting on cash, that could be a tremendous opportunity to enter the market at a discount. Not piling every single penny into debt repayment, and having cash saved up, will give you flexibility and options.

Evan Hickey, financial planner with Royal Bank of Canada, Halifax

In a survey we’ve recently done, eight in 10 students hope to have their student loans paid off within five years, and almost half of them want to buy a home within five years. There’s something to be said about putting some savings away, which in the beginning may be put into a tax-free savings account with the intention of it being for a home. Because what life throws us isn’t always what we expect – if you focus just on debt reduction and something happens, you don’t really have cash savings or a buffer built up.

If somebody thinks they’re ready to buy a home, we encourage them to begin putting away what it would cost them each month. So if a mortgage and property taxes and heat add up to $1,800 a month, then if they can’t actually put that money away now, how are they going to afford the home? We have to set expectations to a realistic level.

And $25,000 as a down payment is 10 per cent down on a decent home here in Halifax, whereas it’s probably not even enough to go talk to a bank about mortgage financing in Toronto. If a client has $25,000 in student loan debt and is making $50,000 or $60,000, it’s not going to be easy to make ends meet. They’ve got to understand how much excess cash flow they have monthly, and divvy it up between their required student loan payment and savings.

Interviews have been edited and condensed.

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