Student loans and mortgages

While the 2020 pandemic and subsequent social distancing measures may have hindered the social experience typically associated with university life, the hefty tuition fees remain the same. Undergraduate students currently pay up to £9,250 a year to undertake their courses, and while there has been talk of the government slashing costs to ‘deliver better value for students’, the fees have been frozen until 2022. How does racking up this level of debt affect students’ financial wellbeing later down the line, and more specifically, what are the implications when it comes to getting a mortgage? This guide has you covered.

Can you get a mortgage with a student loan?

There’s nothing to say that having a student loan will prevent you from getting a mortgage. While this debt will be taken into account for lender affordability checks, your circumstances as a whole will determine your eligibility.

As with any mortgage, there are a number of factors at play that can impact your application. The size of your deposit, credit history, earnings, as well as how much your student loan and any other expenses sets you back each month, are just a few examples.

While it may be more complex to get a leg onto the property ladder if you have a student loan, ultimately lenders just want assurance that you can afford a mortgage on top of your other outgoings.

Approaching a broker can be the best way of ensuring you go about the process properly, and bag the most favourable deal for your individual situation.

What are the impacts of student loans on mortgage applications?

The good news is that, although lenders will take student loans into account when carrying out their assessment, this type of debt doesn’t show up on your credit file and won’t negatively impact your credit score like other forms of credit would.

However, it is a important that you let your lender know if you have a student loan, and the following information should be declared on your mortgage application:

• How much is your student loan repayment per month?

How much you pay out a month on student loan debt could have a big impact on the amount you’re able to borrow, so it’s important to include this with the rest of your monthly outgoings.

Student loan repayments appear on your PAYE employee payslips automatically along with income tax and national insurance contributions, which are deducted automatically in accordance with your earnings. If you’re self-employed, student debt is paid through the tax system in much the same way.

What you are left with after these deductions is your net pay, which is the figure lenders will use in affordability calculations.

If your PAYE income is variable because of bonus or commission, the lender will use an average of the last 3 months student loan payments as a commitment.

• How much of your student loan do you have left to repay?

How much you have left to repay of your student loan is also of interest to lenders, because as with all forms of outstanding debt, they want to know the total amount owed and how long it’s going to take you to pay it back.

Does a student loan affect your credit file?

Student loans don’t appear on your credit file, nor do they impact your credit score, which makes them very different from other types of borrowing. That being said, having one can still impact your financial profile where getting a mortgage is concerned.

Student loan repayments will automatically be deducted from your wages, which means your monthly take-home will be smaller. This is likely to impact your affordability and how much you’re able to borrow when a mortgage provider is assessing your application.

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

Although student loans will not necessarily hinder your application, if your affordability or other circumstances come under scrutiny, getting together a larger down-payment could be a good way to boost your application and instil trust in lenders.

For residential loans, most lenders request a minimum of 10% deposit or 90% loan-to-value (LTV), although there are more 5% deposit options appearing on the market. As with any mortgage application, the larger your deposit the more favourably lenders will look at you.

For example, if you saved a 5% deposit, you might receive a handful of offers from prospective lenders. If you’re in a position to contribute an extra 10% you would have access to far more lenders, and therefore more competitive deals, by shifting to the lower LTV bracket of 85%.

Fresh out of uni and struggling to save? Ask one of our brokers for more information surrounding the government’s Help to Buy: Equity Loan scheme - contribute just 5% and get an extra 20% from the government towards a deposit for a new build home.

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

Traditionally, lenders determine the maximum amount you can borrow for a mortgage by using income multiples, with the majority capping at 4 - 4.5x your salary, some at five, and a select few up to six.

While your income will have to prove sufficient for your desired mortgage, the most important factor is your affordability. Your student loan repayments will be taken into consideration when lenders calculate your debt-to-income (DTI) ratio to determine your borrowing risk.

While your loan repayments may not seem too high, if you have a number of other monthly outgoings a mortgage may not be deemed affordable and you may be rejected. Typically, lenders seek ratios of no more than 36% - although some may stretch to 43%.

It’s also worth noting that, due to the way student loans are repaid, people who have higher incomes are likely to see a more significant impact on their affordability.. This is because the amount you repay is respective to what you earn.

Student loans and mortgages FAQs

The most common queries we receive surrounding getting a mortgage loan with student loan debt are detailed below. Have a question we haven’t yet answered? Don’t hesitate to get in touch.

Can you use a student loan to apply for a mortgage?

Student loans cannot be used as a sole source of income for mortgage purposes. If the funds aren’t taxable, it doesn’t count as income in the eyes of mortgage providers.

However, it may be possible to use a student loan towards a deposit. If you pay the funds into a government-backed scheme such as the Lifetime Isa, you have the opportunity to boost your savings by 25% if used towards buying a home.

For example, if you contributed the maximum £4,000 into the ISA each year you’re at university, the government will add a 25% bonus to your savings with no strings attached.

If you’re smart about it, you could leave university with a few extra thousand towards your deposit already in the bank - but remember, your student loan still needs to be repaid once you enter employment.

Do you have to tell a mortgage lender about your student loan?

Yes, if you have outstanding student loan debt to repay you will need to declare it on your application, otherwise you are committing mortgage fraud.

The amount you pay back each month should be input into the relevant expenditure box on your application form. Ensure that this figure is accurate, as it will be cross-referenced with your payslips if you’re a PAYE employee, and through review of your Income Tax Calculations and Tax Year Overviews if you’re self-employed.

If you are currently earning under the student loan payment threshold, you won’t need to put anything down at this time - but lenders should still be made aware that you have this outstanding debt.

If your circumstances change and you start repaying your student loan later down the line, your mortgage provider needs to know. This probably means that you’ve had a pay rise, in which case mortgage providers should be more than satisfied.

Should you overpay your student loan to help get a mortgage?

Unless you’re in a position to clear your entire student loan debt in one go, it’s not really worth overpaying it. A one-off overpayment will not reduce the amount you repay in subsequent months, which is the figure lenders are most interested in.

For example, if you paid off a lump sum of your student debt to reduce your £12,000 debt to £6,000, your monthly repayments will still remain the same until the debt is repaid. Similarly, if two applicants each earn £34k a year, both will be deducted the same amount irrespective of outstanding balance.

In short, overpaying your student debt is unlikely to affect your mortgage options, and the money could be put to far better use elsewhere - such as your deposit. Owning more equity in your home is likely to save you far more money in the long run.

On a related note, if you have the cash available and don’t need it for a deposit, clearing personal loans such as car finance or credit card debt could be a far more effective strategy. Doing so could improve both your credit score and affordability, both of which can boost your borrowing chances.