Are you worried about how your student loan will affect your chances of getting a mortgage?
With an increase in university fees, many graduates start work with hefty student loans. At some point you may then want to get on the property ladder.
In this article we run through exactly how student loans are assessed by lenders, how they could affect what you can borrow and where to go for the best advice.
Can you get a mortgage with a student loan?
Yes, mortgages are available, even though you may have some student debt.
“Does a student loan affect your mortgage?” is a commonly asked question but it won’t normally prevent you from getting a mortgage.
But mortgage lenders do have an obligation to assess the affordability of any new mortgage and they will take your repayments in to account, alongside any other credit agreements.
So be prepared to provide any details that they may ask for, such as the type of loan, balance and any current repayments.
Student loans are different to other types of loans and will not impact your application as much as a car loan, bank overdraft or credit card would.
Mortgages for professionals
There are a number of occupations which require a degree qualification followed by many more years of studying and training.
This will inevitably lead to higher student debt.
While the amount of debt cannot be altered, there are lenders that will look more sympathetically at your situation, because of your occupation.
These are known as ‘mortgages for professionals‘ and include: doctors, dentists, teachers, engineers etc.
Does it affect what you can borrow?
Your student loan won’t show up on any credit searches but the lender will still ask about any outstanding loans you may have.
All lenders must check that a borrower can afford any new mortgage arrangement. To do this they need to understand both your income and what you spend it on.
The amount you pay out each month to the Student Loans Company (SLC) is important and will be included in these calculations.
However, as the repayments are based on your income (and not the amount of debt), having a student loan rarely causes too many issues.
That said, if you have other debts such as car finance, personal loans, finance agreements and credit cards, this combination may reduce your borrowing capacity.
Do you have to tell a lender about the student loan?
Yes you do.
As with any credit or mortgage application, you have a legal obligation to answer truthfully and disclose any material facts. Withholding this type of information could be classed as mortgage fraud.
And it’s not worth the risk, as obtaining a mortgage with student debt is perfectly possible for most people.
Surprisingly, student loans won’t appear on your credit report. But the amount you owe, and any monthly payments, form an important part of your overall financial situation.
When applying for a mortgage you would need to put down the loan payments as part of your expenditure. The lender’s underwriter will then be able to cross-check this figure against your payslips. Obviously if you are not making any repayments at the moment then this figure will be zero.
For employees, the student loan repayments will appear as a deduction on your payslips, alongside PAYE tax and national insurance etc. Self-employed individuals are required to declare payments on their annual tax return as part of self-assessment.
Will it affect your credit status?
Student loans don’t appear on your credit file, so lenders (or anyone else) won’t know about the size of your student debt unless they ask about it.
In this way they don’t directly affect your credit status or credit profile.
However, it is possible that it could affect your credit score and your mortgage affordability.
While lenders get your credit file date from a Credit Reference Agency, they also apply their own criteria, to create an internal credit score. And this will be adjusted for affordability based on monthly take home pay and regular expenditure, which will include the student loan repayments.
How much do you need to earn?
There’s no specific amount of income needed where a student loan is present.
First and foremost, lenders look at your gross annual income. Using an income multiple approach, they first calculate your maximum borrowing capacity. Typically, lenders will lend up 4 to 5 times your gross annual income.
Example: Gross earnings of £30,000pa. Multiplied by 5 = £150,000 possible mortgage amount.
If you are buying with someone else then their income will also be used as part of these calculations.
The most important factor is your monthly affordability and your student loan will affect your debt-to-income (DTI) ratio. As they are based upon a pre-determined percentage, student loan payments tend not to cause too many problems.
But if you also have other credit agreements such as car finance or credit cards then the lender may view you as being over committed and reduce the amount it is willing to lend you.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
What deposit is needed?
The actual amount of deposit you need will be affected by the purchase price of your property.
As a percentage, there are quite a few lenders offering 95% loan to value mortgages, which require a 5% cash deposit.
So if you were buying a house for £300,000, your deposit would be £15,000 and the mortgage £285,000.
The higher deposit you can afford, the more mortgage choices you will have. Once you have 10% or more, you will find there’s more lenders interested, with better interest rates.
What’s the difference between a mortgage deposit and an exchange deposit?
Will a student loan stop me getting a mortgage?
The fact that you have some student debt won’t, by itself, stop you from getting a mortgage.
Lenders look at your current monthly expenditure, to see how it may affect your ability to meet your new mortgage payments. They will want to know about all of your debts, including university student debt. Regular commitments such as personal loans and car finance payments will reduce the amount you can borrow.
A large amount of student debt won’t automatically go against you, in the same way that a large loan or credit card bill might.
Student loan defaults
Missing a payment on any type of credit agreement may impact your ability to get a mortgage. Whether or not it reduces your chances of getting a mortgage will depend on the level of outstanding payments and the reason why this occurred.
If you have missed payments on this loan, plus some others, then it may be necessary to consider a bad credit mortgage, where the lenders are a bit more tolerant of certain credit issues.
With the help of a mortgage adviser who is experienced with bad credit, you should find lenders who are able to help.
Check your credit file
As a graduate you may feel that you don’t need to check your credit file.
Obtaining a copy of your own credit report will enable you to see what a lender will see. Most of the time all is well. But mistakes do get made and also false entries can appear if someone has taken credit out in your name.
It’s best to get this out of the way before you start looking for a specific mortgage. Although errors can be rectified, it could take longer than you think.
Mortgage advisers are happy to be sent a copy of your report, so they can check the entries as well.
How a mortgage broker can help
If you have a student loan and you are worried about how it could affect your mortgage chances then it’s a good idea to speak with an independent mortgage broker.
A qualified broker will be able to look through your income and expenses, including the student loan, and then tell you how much you can borrow and the types of lenders available.
Where possible, make contact with a broker before you have found a property that you want to buy.
It takes away all of the pressure and means that you have time to get your finances in order.
Respect Mortgages works with one of the UK’s largest whole of market mortgage brokers, who have specialist advisers for people with student debt.
Please call us on 0330 030 5050 or click the button below to have a free no-obligation discussion.
What the lenders say
Here’s what the Natwest says:
Student loans
Repayment of student loans is dependent on receipt of a minimum income. They need only be included as a financial commitment to be taken into account for mortgage affordability if the applicant is already making repayments.
Here’s what the Bath Building Society says:
Criteria Policy Notes:
Bath Building Society will include ‘Student Loans’ when assessing borrowers affordability.
Here’s what the Leeds Building Society says:
It is important that an applicant disclose all existing financial commitments, including but not restricted to loans, hire purchase agreements, student loans, maintenance payments, leasehold payments, maintenance lease, ground rent, service charges, mortgages, school fees, child care / nursery fees, the cost of any interest only repayment strategy and other significant out goings. The monthly payment on these commitments will be deducted in assessing affordability.
The applicant will also be required to give details of anything that they are aware of that will, or is likely to, change their income or expenditure during the term of the mortgage.
Here’s what the Nottingham Building Society says:
COMMITMENTS AND EXPENDITURE
The affordability calculator will ask for all monthly commitments and household expenditure. The household expenditure should be based on the property to be mortgaged. We will take into account any monthly credit commitments (including student loans) where there is an outstanding term of six months or more.
Here’s what the Yorkshire Building Society says:
Your income and expenditure
To ensure that you can comfortably afford your mortgage repayments, the amount we will allow you to borrow is determined by both your income and your expenditure. When deciding how much you can borrow we consider the following:
Information about your salary including any regular bonuses or overtime you receive. Any benefits or payments towards childcare you receive (such as child maintenance). Your financial commitments including credit cards, overdraft usage or loan repayments (including student loans). You should include any payments made towards childcare or child maintenance.
Here’s what Barclays Bank says:
The following commitments must be considered.
- Hire Purchase Agreements including Mail Order Payments, Bank Loans, Finance Loans, Payday Loan Advances (full amount outstanding applies) or Second Charges.
- Any other or future commitments such as monthly fees/interest payments under a shared equity loan agreement and/or deferred credit payments. If a customer is a guarantor for any mortgage, property rental agreement, secured loan or any other loans then the monthly payment of such commitments is applied in the affordability assessment in line with these requirements.
- Regular Pension Payments – including any additional voluntary payments (eg AVCs) being paid regularly from income. ‘One-off’ contributions, for example from an annual bonus, can be disregarded. (Note: pension contributions will be automatically calculated as part of the affordability assessment. They should not be input as part of the application process)
- Court Orders relating to maintenance payments or judgement debts.
- Child Support Agency (CSA) payments.
- School Fees and Child Care/Nursery costs.
- Current Monthly Student Loan payment.
- Liability for ground rent, service and maintenance charges under any leasehold, commonhold or other agreement – including any equity sharing agreements.
- Credit Card debts (at the rate of 3% of the debt outstanding) including Store Cards.
- Overdraft debts (at the rate of 3% of the drawn balance at the time of application).
- Council Tax.
- Shared Equity Loan.
- Other regular commitments (excluding living expenses, clothes, food, utilities)
Here’s what the Harpenden says:
Criteria Policy Notes:
Harpenden Building Society will include ‘Student Loans’ when assessing borrowers affordability.
FREQUENTLY ASKED QUESTIONS
Normally it would make good financial sense to repay any debts as quickly as possible. But student loans are one of the few areas where it may not be in your best interests to do this.
The vast majority of people don’t clear their loan before it is automatically cancelled by the government. Paying extra is rarely a good idea that will benefit you financially.
Student loans don’t go on your credit file, so it’s not treated as a debt in the traditional sense when applying for credit.
No. Student loans are different from other types of borrowing because they do not appear on your credit file and your credit rating is not affected.
Any mortgage lender will want to know about the debts you have incurred and the related monthly costs. A bank will calculate how a student loan of a certain size will affect your ability to keep up with the mortgage repayments.
This will be included within your loan agreement. The terms have changed a few times, but many will stop after 25 or 30 years or at age 65.
When you take out a student loan you must agree to repay your loan in line with the regulations that apply at the time the repayments are due, subject to the regulations being amended from time to time.
Your loan contract is with the Secretary of State for Education in England. The Student Loans Company Limited (SLC), which is a non-profit government organisation, is acting as an agent on their behalf.
By law, you must repay your loan in line with the loan contract and regulations. If you don’t make repayments, SLC have the right to take legal action to recover your debt. This means SLC can get a court order to make you repay the total debt plus interest and penalties in a single payment.
This can be enforced through the courts as a civil debt, whether you’re in the UK or living abroad, and you’ll be responsible for all costs, including legal costs.
The majority of mortgage lenders will accept applications from people with student debt. If there is a problem, it is generally related to other types of unsecured debt.
They need to see that you have stable employment and a regular income.
No. Your application will be assessed in the same way as someone who does not have any student debt. As a graduate, your long-term employment prospects are good and lenders understand how student loans are accrued.
A student loan is a debt but it is treated differently to a personal loan or credit card. With student debt the repayments only start when your earnings are above certain limits and the monthly payments are based on what you earn, not what you owe.
It will not appear on your credit report.
A BBC article from March 2024 states that graduates in England leave university with average debts of £44,940.
Unsecured personal loans (like a bank loan) will show on your credit file, and the payments are usually paid from your main bank account. It’s certainly possible to get a mortgage even though you have a loan, but the monthly repayments will form part of the lenders affordability checks, which may reduce the amount you can borrow.
Student loans and how they’re repaid works differently from other types of borrowing. For example, did you know you will only repay when your income is over a certain amount? Or that if you have an outstanding balance at the end of your loan term it will be written off?
It’s important to understand these differences, so you know what to expect when it comes to repaying your student loan.
Here’s a list of 8 things you might not know about your student loan, but definitely should.
1 – There are different rules for repaying based on when and where you took out your loan
The type of loan you have will depend on when and where you started studying. This is known as your plan type. Each plan type has a different set of rules for repaying so it’s important you understand which plan type you’re on so you can better manage your repayments.
2 – Your repayments are based on your income, not how much you borrowed
Unlike other borrowing, what you repay depends on your income and not how much you owe. You repay 9% of your income above the repayment threshold for your plan type. If you’re not working or your income is below the threshold, you won’t make any repayments.
3 – You need to keep your contact and bank details up to date even after you finish studying
After you’ve finished your course, we’ll still be in touch, so it’s important that you keep your contact details up to date. Otherwise, you’ll miss out on important information about your student loan repayments.
You should also keep your bank details up to date in your online repayment account in case you’ve repaid more than you owe and are due a refund. It’s important you check we have the correct information for you so we can process your refund quickly when you contact us.
4 – You can make voluntary repayments… but consider your circumstances carefully
You’re free to make additional repayments towards your loan at any time. This is optional and before doing this, it’s important to think about your personal and financial circumstances and how these might change in the future. Don’t make voluntary repayments if you do not expect to fully repay your outstanding balance by the end of the loan term. If you’re not sure about making a voluntary repayment, you should get professional advice from a financial advisor – SLC can’t give financial advice. Remember, any voluntary repayments you make can’t be refunded.
5 – Going abroad for more than 3 months? Let us know before you go
If you are leaving the UK for more than 3 months, you need to let us know so that we can continue to make sure you’re repaying the correct amount towards your student loan. It’s quick and easy to update us before you leave.
6 – Your student loan doesn’t have any impact on your credit rating
Student loans are different from other types of borrowing because they do not appear on your credit file and your credit rating is not affected. However, if you apply for a mortgage, lenders may consider if you have a student loan when deciding how much you can borrow.
7 – Your loan will eventually get written off
Even if you’ve never repaid, your student loan balance will be written off after a period of time. Depending on the repayment plan you’re on, this will either be 25 years after you become eligible to repay, 30 years, or once you turn 65.
8 – You should switch to Direct Debit when you’re close to fully repaying to avoid over-repaying
When you’re within the final 2 years of loan repayment, you should take the opportunity to switch your repayments to Direct Debit so you don’t pay back more than you owe through your salary.
https://www.gov.uk/government/news/8-things-you-should-know-about-your-student-loan–2
