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Does a Student Loan Affect Your Mortgage?
When it comes to trying to work out how much purchasing power you have when looking to buy a house, it makes sense to look into your personal finances to see what might cause a problem - is your student loan one of those things?
The answer is both yes and no. Yes, your student loan will affect your mortgage, though probably not as you expect. They don’t show up on your credit history, but having to make monthly repayments will be considered when assessing your affordability. What does this mean? Let’s look deeper.
Table of Contents
- How UK Student Loans Work
- How Student Loans Affect Mortgage Applications
- Self-Employed Applicants with Student Loans
- Specialist Concerns (High Earners, Joint Applicants etc.)
- Lender Variations in Assessing Student Loans
- Minimising the Impact with Clifton Private Finance
A Quick Look at How Student Loans Work
In the UK, student loans are unique in the way they’re structured. They’re nothing like personal loans or credit cards. You don’t repay them in fixed monthly instalments and they are written off at the end of the term (the loan term, not the academic one!) no matter how much remains to pay. What’s more, the amount you have to repay each month is calculated based on your income. Oh, and there are different ‘plans’ that dictate how much you pay and for how long.
The plan you are on isn’t chosen by you. It’s determined by when you started university, and where your primary home was at the time - typically your parents’ home if you went straight to university from living with parents. Each plan has its own repayment threshold and loan term.
If that sounds complicated, that’s because it can be. Thankfully, no matter which undergraduate plan you are on, the core repayment is very similar - you repay 9% of your gross income above the threshold (between £25,000 and £28,000, depending on the plan).
Student loan repayments are calculated based on your gross income (before tax and NI) and are taken automatically from your salary each month.
How Student Loans Affect Mortgage Applications
The rare structure of a student loan has a number of benefits when looked at from a mortgage application point of view:
- They don’t impact your credit rating - Your student loan has no effect on your credit history. When it comes to a mortgage application, this means your student loan is irrelevant for this core part of the risk assessment.
- They don’t reduce your gross income - Though the student loan is calculated based on your gross income, it isn’t actually taken away from your pre-tax income and therefore doesn’t affect your loan-to-income (LTI) ratio that is a key factor used to determine your maximum mortgage.
- They don’t count as a legal debt - This means you’ll never be chased by bailiffs looking to recover the balance. While this has no impact on your mortgage, it can be reassuring when you consider your debt obligations with a mortgage application in mind.
- They have repayments that shrink if you take a salary cut - If your salary lowers, so does the amount you have to pay on your student loan. This makes them a lower risk liability for a lender to consider.
- They do not need to be repaid if you earn less than the threshold - An extension of the above, if you lose your job or your salary otherwise drops below a certain point, you are not tied to student loan repayments at all.
- They will eventually be wiped out - At some point, your student loan is cleared entirely. This can help a mortgage application for those approaching that time.
That doesn’t mean a student loan has no effect on a mortgage application. Student loans do affect your debt-to-income (DTI) ratio, lowering your disposable income and impacting your affordability check. If you are making a £100 per month repayment to your student loan (as in the example above), then your affordability calculation is impacted. Furthermore, the amount you repay your student loan will grow as your salary increases, effectively reducing your monthly affordability by £7.50 for every £1,000 of additional annual income.
How Being Self-Employed with a Student Loan is Different
When you’re self-employed you repay student loans as part of your annual self-assessment. This means that instead of paying a small amount each month, you are hit with a larger bill once a year.
This can be both a help and a hindrance when it comes to getting a mortgage.
Already, self-employed mortgage applicants face an uphill struggle. Without a specialist mortgage broker to help you navigate LTI sizes based on recents SA302s and present complex multiple income streams to a mortgage lender, you can find yourself facing unfair assumptions and miscalculated affordability checks.
Add to that the additional complexity of a cash flow crunch in January when a tax bill, a sizeable national insurance contribution, and a student loan repayment that’s twelve times larger than a typical monthly deduction all hit at the same time and you can find it impossible to get a mortgage approved.
More than that, we work with specialist lenders who are geared towards providing mortgages for the self-employed. These dedicated mortgage providers offer superior mortgage terms that match your circumstances and have the systems needed to treat self-employed graduates fairly.
Specialist Concerns with Student Loans and Mortgages
Being self-employed is not the only finely nuanced situation that benefits from an experienced mortgage broker. Consider:
- High earners - The larger student loan repayments that come from earning significantly above the threshold can impact your affordability far more than may be expected. Working with Clifton Private Finance will minimise this effect, with our close lender relationships offering you an assessment that comes with understanding.
- Under-threshold earners - We can help those under the student loan threshold maximise their loan-to-income ratio to get the most out of their budget, ensuring that lenders base their affordability calculations on realistic forecasts and avoiding unfair stress tests that assume larger student loan repayments.
- Joint applicants - When one person has a student loan and the other doesn’t, or when the loans are on different plans, joint application calculations can become difficult. Clifton Private Finance can explain how the final calculations are done and help you work out the best options for the maximum mortgage size.
- Contractors and umbrella workers - With complicated and fluctuating income levels, a potential mix of PAYE and self-assessed income, and student loan repayments that may change month-to-month, contractors and those working with umbrella firms can face extreme difficulty getting a mortgage from a traditional lender. Clifton Private Finance have established relationships with the wide range of specialist mortgage lenders across the UK, giving you the best possible chance for a mortgage.
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The Variance of Lenders
Not all mortgage lenders see your situation in the same way. Some lenders will increase the stress testing against your student loan, assuming a rise in repayments that may not be realistic and reducing borrowing potential in turn; while others treat student loans with almost casual disdain, providing you with a comfortable mortgage that’s only affected a little by your student loan repayments.
Working with a professional mortgage broker is essential when it comes to finding the lender who is best suited to your individual circumstances.
Minimising the Impact of Your Student Loan with Clifton Private Finance
In an ideal world, the hard work you put in at university would always result in a positive impact for your home buying - at Clifton Private Finance, we aim to make that true. We know which lenders are friendly to graduates, treating a student loan as the minor inconvenience it is, rather than a significant debt - and we’re here to share that with you.
Whether you’re a PAYE employee looking to just get the best mortgage value possible with your student loan, or a self-employed entrepreneur with complicated finances and a large student loan payment once a year, we can match you with a mortgage lender who understands you fully.
From a first-time mortgage straight out of university, to a remortgage for an older academic approaching the write-off stage of your student loan, we can help. Contact Clifton Private Finance today.
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