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Does having a student loan affect a mortgage application?

MORTGAGES | 18.05.2022

When choosing to go to University there is a hefty fee that comes with it. So how does acquiring this level of debt affect us further down the line – such as when trying to get a mortgage? This guide is here to help you gain a better understanding of how a student loan may affect your mortgage application.

The important thing to note about student loans is that they are treated differently from other types of debt, and will not appear as part of your credit score, however, the fact that you are making monthly repayments will be taken into account when a mortgage lender assesses your ability to repay your mortgage each month. This is known as the mortgage affordability test and is something that all lenders are obliged to do when considering mortgage applications. 

How does a student loan affect a mortgage?

Mortgage lenders need to decide how much money they can lend out and to do so 3 things are considered. First, how much money you earn, followed by how much of your income is already used for current outgoings, and finally your track record of repaying money that you owe. Usually, the more you earn, the more you can borrow. Similarly, the more you owe, the less you can borrow. However, lenders will focus on the monthly payments you owe, rather than the total. This means that an individual with £1000 student debt, and an individual with £10,000 student debt may be able to borrow the same amount if the monthly repayment is the same due to being in the same income bracket.

What If you earn under the payment threshold?

If you haven't started paying back your student loan yet due to not earning enough, you won't be penalised. You can check the payment threshold and repayment amounts here. If your total monthly payments on all loans and debt are very low, it’s possible that a small student loan repayment won't affect you when applying for a mortgage.

Paying off your student debt

It is only worth overpaying a student loan for the purpose of a mortgage if you’re going to clear the entire debt. Reducing your student loan total would still result in you paying the same monthly repayment, and therefore would have no effect on how much you’re able to borrow for a mortgage.  Clearing a student loan completely could result in a better likelihood of being able to borrow more, however, clearing personal loans such as credit cards and car finance is a better option for improving the chance of being approved for a mortgage. 

How much deposit do you need to get a mortgage with a student loan?

If your affordability or other circumstances may seem to hinder your application, getting together a larger down payment is a good way to boost your application and ensure lenders are more likely to trust your ability to make future mortgage payments.  For residential loans, most lenders will require a minimum of 10% deposit. As with all mortgage applications the larger the deposit, the more favourably lenders will view you. 

Will a student loan affect your credit score when getting a mortgage?

A student loan doesn’t appear on your credit report, meaning it won’t affect your credit score. Lenders will still see student loan repayments on payslips and tax calculations, however.  To put yourself in a strong position for getting a mortgage, especially if you have a high amount of student debt, you should focus on obtaining a healthy deposit, building a strong credit history and applying with a solid income are the best ways to help support your mortgage application and give you a better chance of a competitive rate.  While getting a mortgage with a high amount of student debt can sometimes make the process a little trickier, lenders ultimately just want assurance that on top of your current outgoing, you can also afford mortgage repayments. 

Getting a mortgage 

Fresh out of uni and wanting to start saving for a mortgage? Speak with one of our team for more information about getting a  Help to Buy ISA. Approaching a broker can be the easiest way of ensuring you go about the process properly to get the best advice and help you need in securing the best deal for your personal circumstances.   
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