Student loans can limit you from doing a lot as a youth because you have to pay it off. However, can you manage to pay a mortgage with your Helb loan still pending?
But like many millennials, you may also want to buy your first home. This financial goal is a rite of passage for many Kenyans, but those with Helb debt may be left wondering how their debt will affect their ability to buy a home.
We explore if it’s better to save for a down payment or pay off student loans first—or how you may be able to do both.
Should I Save for a Down Payment or Pay Off My Helb Loan?
The right financial move for you depends on a few factors, but most importantly, your debt-to-income ratio. Your debt-to-income ratio is the amount of your monthly income that does toward paying your debt. This can include credit card debt, a car loan, and student loan debt.
Keep in mind that there are two types of debt-to-income ratio: front-end, and back-end. Front-end is calculated by estimated housing costs (i.e., your mortgage payment and insurance) divided by gross income.
The back-end is the percentage of your gross income that goes housing costs, plus other debts, like credit cards, car loans, and student loans. Mortgage lenders generally look for a back-end debt-to-income ratio of 36% or less, though the SACCOs will accept a DTI as high as 50%.
Calculate Your Debt to Income Ratio
If your debt-to-income ratio isn’t up to par just yet, focus on paying off your Helb to lower your debt-to-income ratio, and then apply for another mortgage down the line. You could also save up money for a larger down payment, which will decrease your necessary mortgage amount, in which case, your debt-to-income ratio may not be a sticking point.
One study found that the average university graduate with student loan debt would be unlikely to qualify for a mortgage due to their debt-to-income ratio. It also found that half of those with student loan debt had a debt-to-income ratio of 49%, well above the suggested ratio.
Before deciding which path you’d rather take, calculate your debt-to-income ratio and see if obtaining a mortgage with your current student loan debt is doable.
If your debt-to-income ratio is not within the acceptable range for a mortgage, then you’ll need to focus on paying off your student (and other) debt before getting a mortgage. Once your debt-to-income ratio is lower, you can revisit.
If your debt-to-income ratio is acceptable to mortgage lenders, then you may want to start saving for a down payment first, while also paying on your student loans. Read on to learn how you can do both.
How You Can Do Both
Perhaps your timeline to buy a new home isn’t as flexible and you can’t wait to pay off your Helb loan first. Or maybe you’d prefer to work toward both financial goals simultaneously, and your debt-to-income ratio isn’t an issue.
Saving up for a down payment and paying off your student loans at the same time is doable.
Start with a budget. Cut any optional spending, from wifi to happy hours with friends, even shopping for clothing. After you’ve made all your non-discretionary spends, like groceries, rent, and utilities, split the rest between your down payment fund and your Helb loan payments.
You may want to allocate a bit more to one debt. For example, if you have a credit card with a high-interest rate, focus on paying that off first. Then, put the money saved on interest toward your down payment and your other debt, including student loan debt.
Other tips to work toward both goals at the same time—put the funds for your down payment in a separate or hard-to-access bank account, so you won’t be tempted to spend it.
Have both your monthly savings goal and your Helb loan payment automatically deducted from your checking account each month. Or work on refinancing and consolidating your student loans to get a better interest rate or payment plan.
When deciding whether to pay off your Helb or save up for a down payment, many factors—such as other debt, your credit score, and the interest rates on both your student loans and your mortgage—will play into your decision.