Does a Student Loan Affect a Mortgage?
Does a Student Loan Affect a Mortgage?
The short answer to does a student loan affect a mortgage is yes, probably. By how much will vary on you and the lender you apply to. There are cases where a student loan won’t affect your mortgage at all though.
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How does a student loan affect a mortgage?
When mortgage lenders are deciding how much money they will lend to somebody they focus on three key things. First is how much money you earn. Second is how much money you already have committed each month. Third is your track record of repaying money that you owe.
The more you earn the more you can borrow, usually.
The more you owe the less you can borrow, usually. But remember, the lender is more interested in your monthly payments on what you owe as opposed to the total figure. This means that two people with the same income, one with a £1,000 student debt and one with a £8,000 student debt might be able to borrow the same amount if their monthly loan payment is the same due to being on the same salary.
Finally your track record will be assessed by a review of your credit score. The higher the score, the more lenders will consider you. You usually need a higher score to be considered by the lenders that will lend the most money and provide the lowest interest rates.
This article talks about many of the things you should consider when arranging your first mortgage.
What if you earn under the payment threshold?
No. If you haven’t started paying your student loan yet because you don’t earn enough you won’t be penalised. You can check the payment thresholds here.
It also means that as your income increases, your student loan repayment will increase. Thankfully your student loan repayment won’t increase faster than your pay. This means a pay rise that takes you over the student loan payment threshold won’t mean the banks will lend you less.
If your total monthly payments on all loans are very low, you may find that a small student loan repayment won’t actually affect you when getting a mortgage.
If you are self employed you may be asking how does a student loan affect a mortgage when you don’t get a pay slip. The lender will look at your Tax Year Overview and Tax Calculations and see your payment on there and then treat it as a monthly commitment.
Do you have to tell a mortgage lender about your student loan?
Yes. You need to tell the lender everything they ask. If you withhold or mislead them you will have committed mortgage fraud.
Usually you, or your Mortgage Broker, would declare your student loan by inputting the monthly amount in the student loan payment or other committed expenditure box on your mortgage application. When assessing your case the mortgage underwriter will then cross reference this amount. They do this by reviewing your payslip or Tax Year Overviews and Tax Calculations if you are self-employed.
If you are currently earning under the student loan payment threshold you won’t need to put anything down. If you do start paying back your loan in the future then this will be because you are earning more. Overall you’d be in a better position so the mortgage lender will be satisfied.
Should you overpay your student loan to help get a mortgage?
Probably not. Remember that the lender isn’t looking at the total size of your student loan, they are looking at the monthly deduction from your pay. That means in theory they would treat two people both earning £30,000 per year the same even if one had a £10,000 student loan balance, and the other had a £80,000 student loan balance. This is because they would both have the same money available after their mortgage after their student loan payment each month.
This means that overpaying your student loan could have no affect on your mortgage options. The money used to overpay a student loan could have been used for a bigger deposit, and therefore a smaller mortgage.
Should you clear student loan debt or other debt to help get a mortgage
It’s only worth overpaying a student loan to get a mortgage if the overpayment will clear the entire debt. That is the only way to remove that monthly repayment from your payslip. If you paid a lump sum off and reduced a £30,000 balance to £20,000, your monthly student loan payment will be the same. This would have no effect on your mortgage borrowing availability. This is because an overpayment this month will not reduce your payment next month.
If you had the cash available, and didn’t need it for a deposit, clearing a student loan completely might enable you to borrow more. It is more likely to have a better effect as a larger deposit though.
Clearing personal loans, such as car finance, could be a much better strategy to improve your chances of getting a mortgage. For every £100 of credit card debt you have, lenders will typically treat this as £5 per month not available to repay a mortgage. This causes them to reduce the amount available for you to borrow.
Much like with a student loan, when it comes to personal loans, lenders are more interested in the monthly repayment than the total amount to be repaid. That’s because every pound being used to pay a car loan each month is a pound not available to repay a mortgage. This causes the bank or building society to lend less.
If an overpayment leads to a lower monthly repayment this could increase the amount you can borrow. However, it’s more likely this overpayment could have been used to fund a larger deposit on the home.
Credit card debt
You will normally be able to borrow more by reducing any credit card debt, even if you don’t clear it completely. For every £100 of credit card debt you have, lenders will typically treat this as £5 per month not available to repay a mortgage. This causes them to reduce the amount available for you to borrow.
Does a student loan count as income for mortgage purposes?
No. As a rule of thumb, if it’s not taxable, it’s not income. And if it’s not income the lender isn’t interested. A stipend can be counted as income for a mortgage though.
Do student loans affect credit scores when getting a mortgage?
No. Your student loan does not appear on your credit report, so it can’t affect your credit score. This doesn’t mean the lender won’t know about it though. They will see your student loan repayments on your payslips or tax calculations.