# Pay off Student Loans or save for down payment?



## ice1124 (Aug 21, 2009)

Hey everyone, it's my first day here.

My wife and I are trying to decide whether to use majority of our disposable income toward paying off our Student Loan ($28,000+$19,000 @ 4.75% floating) sooner versus saving for our down payment for our first home (condo in Toronto).

If we double our student loan payment, we can be free of debt within two years, otherwise, it'd be 4.5 years.

But that means we'd be postponing our first home purchase.

We have about $10,000 saved for down payment in personal RSP and multiple savings accounts.. maybe we should use the non-RSP portion to pay off our student loans even faster.

What do you think? Any advise will be appreciated.

Thanks!


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## OhGreatGuru (May 24, 2009)

Pay off the loans using non-RSP savings and disposable income. It may delay your home ownwership, but the student loans reduce the amount of mortgage you are eligible for, and the monthly payments you are capable of carrying.


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## moneygardener (Apr 3, 2009)

6 of 1 and 1/2 dozen of another.

A couple things:
Do you have any other debt?

Are you uncomfortable with your current living conditions?

The answers to these two questions would influence my advice.

If you don't have any other debt and you are unhappy with your current living arrangements, I would concentrate on saving for a dp. Just make sure you don't over extend yourself and make getting rid of your student debt a priority early on after you get settled. Not all decisions should be made purely on a financial basis. Psychologically, maybe you want to get into a condo and begin your life together before tackling this low interest rate debt.

Regarding Guru's point - As long as you and your wife are earning decent incomes, I would not worry about these loans reducing the amount of mortgage you get pre-approved for. In my opinion you should not obtain a mortgage for anywhere near the amount banks are willing to give you.

Good luck!


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## sprocket1200 (Aug 21, 2009)

try taxtips.ca for information on comparisons. you need to find out where the greater return for your money will be. since this is a fluid decision, you will need to monitor it and change as necessary.

recently, we went from double mortgage payments, to regular, to minimum. the whole time investing the difference since the prices were so low. the result? returns of 13-14% on our investments so far this year. not bad for a recession...


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## ice1124 (Aug 21, 2009)

moneygardener said:


> 6 of 1 and 1/2 dozen of another.
> 
> A couple things:
> Do you have any other debt?
> ...


Thanks for the advice.. We don't have any other debt other than the student loan. we recently finished paying off some debt from our wedding and related expenses.

The bank is willing to give us what we'd need for DP even with the student loan, but we'd probably need most of it for a home purchase, with which I do not feel so comfortable.

So our decision has been set: pay off the student loans aggressively within the next two years and be done with it!

It will make saving so much faster once we get rid of it.. wish us luck!


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## PMREdmonton (Apr 6, 2009)

I would suggest you pay off your student loans because interest rates will increase soon. This will likely drive down the price of real estate and increase the cost of your variable rate loan. So you get two benefits: a lower loan principal on your mortgage and you don't get dinged by the rapid escalation in variable interest rates. When I graduated BOC prime was 4.50% and bank prime was 6.25%. In your case, you are paying bank prime + 2.50% meaning that you would have been paying 8.75% on the student loan. 

Financially delaying your gratification will also start a good habit of saving which will serve you well throughout your lives together.


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## ice1124 (Aug 21, 2009)

PMREdmonton said:


> I would suggest you pay off your student loans because interest rates will increase soon. This will likely drive down the price of real estate and increase the cost of your variable rate loan. So you get two benefits: a lower loan principal on your mortgage and you don't get dinged by the rapid escalation in variable interest rates. When I graduated BOC prime was 4.50% and bank prime was 6.25%. In your case, you are paying bank prime + 2.50% meaning that you would have been paying 8.75% on the student loan.
> 
> Financially delaying your gratification will also start a good habit of saving which will serve you well throughout your lives together.


If my memory serves me correctly, I was paying 8.25% for the student loan when I first started repaying the loan about three years ago. 

We've come up with yet another option:

- Pay off the student loan in three years instead of two, 
- keep renting at the current place,
- get a car. 
We wouldn't have much to save so home purchase will have to wait until mid-2011. I know it's not the worst financial choice of the three options, but we'd really like to get our own vehicle.

Bad idea?


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## Guest (Aug 25, 2009)

definitely paying off that loan should be a priority.

Owing a home is a huge commitment, which is usually 20-25 years. You can't afford to fall behind.

Speaking of which, on top of having money for a down payment, you should have additional savings as an emergency fund because you know things always happen.

Paying off that loan gives you a nice clean slate, don't be like the rest of people out there that rush out and buy houses, cars, and end up being in debt for their entire life.


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## PMREdmonton (Apr 6, 2009)

ice1124 said:


> If my memory serves me correctly, I was paying 8.25% for the student loan when I first started repaying the loan about three years ago.
> 
> We've come up with yet another option:
> 
> ...


Cars are expensive, but sometimes they can add enough to QOL to justify so long as they are reasonably affordable. If you buy something reasonable like a 3-year old Ford Fusion it shouldn't put you back too much and should provide Camry like reliability at about half the cost.


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## ice1124 (Aug 21, 2009)

PMREdmonton said:


> Cars are expensive, but sometimes they can add enough to QOL to justify so long as they are reasonably affordable. If you buy something reasonable like a 3-year old Ford Fusion it shouldn't put you back too much and should provide Camry like reliability at about half the cost.


That's exactly the car I was thinking of (2006 model) if was going to buy a sensible used car. I was also thinking about 2006 Acura TL for around $19,000, but that one will have to wait until I have cash to pay for the whole thing.

Having a car will definitely add QOL (it took me 5 seconds to figure out what it was), but I don't think it's $700/mo. worth.

I will continue to use Zipcar (car sharing) and keep my initial plan of paying off our student loans within two years. 

Thanks everyone for your opinions and advice.


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## Underworld (Aug 26, 2009)

Meh - I bought a house and still have a student loan. I've always wanted to own and now have a lot of happiness from it. Keep in mind you will be saving yourself the cost of the rent by buying a house.

For me it was around 12k per year in my own pocket. Also if the value of the house goes up in the next few years you have more equity to leverage from. Also in Canada don't you get some tax credit towards student loans? (I have one from the UK)


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## ice1124 (Aug 21, 2009)

Underworld said:


> Meh - I bought a house and still have a student loan. I've always wanted to own and now have a lot of happiness from it. Keep in mind you will be saving yourself the cost of the rent by buying a house.
> 
> For me it was around 12k per year in my own pocket. Also if the value of the house goes up in the next few years you have more equity to leverage from. Also in Canada don't you get some tax credit towards student loans? (I have one from the UK)


There is tax credit for taxes paid on student loans, but I don't want to have two large debts at the same time in my life. Having said that, my wife and I modified our plan to save for a down payment until July 2010, and then pay off the student loans more aggressively.


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## The Financial Blogger (Apr 4, 2009)

Maybe you want to consider the following before making a final decision:

Housing market seems to avoid the recession and we won't get hit as the US were (according to recent reports from CMHC). So, if the condo you want to buy is 200K today and you wait 2 years because you want to pay off your debts, the same condo will worth 212K (at a 3% increase rate).

If the housing price increases by 5%, the condo will be at 220K and you will still have only 10K as cash down... which is insufficient...

I would maintain my student loan as is and try to increase my cash down ASAP.


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## Ben (Apr 3, 2009)

I paid off 30k student loan in less than 1-year after grad through saving and overtime - it was the best financial decision of my (still young) life. Through concurrent and prior savings, we then put together 20% downpayment, and bought a house.

1. Set aside 3 months expenses in cash for e-fund, if you have not. This money is designated not for the downpayment, not for the student loan, but for sitting in a savings account.
2. Through the lens of my own biased history, I would significantly reduce the student debt first before looking at home ownership. 
3. However, this essentially is not about whether your debt is titled "Student Debt" or "Mortgage Debt", but rather "Total Debt". It matters little how it is apportioned, although each type of debt will have different "flexibilities", or payment options available at different times as required. Your total debt needs to be a manageable size relative to your income. I believe that debt should be less then 3x gross household income - others may be comfortable with more; I am not.
4. When you do decide to buy a house/condo, spend a little time to look into the crystal ball and picture a few years out. Where do you think interest rates will be? Could you afford your debt load at 7%? Will you both still be working - perhaps kids will enter the picture? 
5. Real estate prices are another thing entirely to predict, so I won't. But I don't believe it goes up forever. My house is up 18% in the last 6 months alone, or about 36% annually. That is not sustainable, in my opinion.

And probably a good call to delay the car purchase. They are more or less necessary for those who commute from the burbs, but far less so in an urban area where Zip/rentals can meet your needs for less money.

Cheers, Ben


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## Rickson9 (Apr 9, 2009)

The Financial Blogger said:


> Housing market seems to avoid the recession and we won't get hit as the US were (according to recent reports from CMHC). So, if the condo you want to buy is 200K today and you wait 2 years because you want to pay off your debts, the same condo will worth 212K (at a 3% increase rate).
> 
> If the housing price increases by 5%, the condo will be at 220K and you will still have only 10K as cash down... which is insufficient...
> 
> I would maintain my student loan as is and try to increase my cash down ASAP.


To the OP, I would avoid this idea. I wouldn't be concerned that an asset price will "get away" from me. Chasing the price of an asset upwards has never contributed to my ability to build wealth. Never feel that you need to buy when prices are rising.


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