Should you pay off a student loan? Five tips for getting a mortgage and buying a home — without paying off student debt
Still paying off your student loan? Your debt may be reducing steadily but what happens when it’s time to buy your first home?
Should you try to clear your student loan so that you are “debt free” before applying for a mortgage?
No, says mortgage expert Dilpreet Bhagrath of online mortgage broker, Trussle.
“You need to buy as soon as possible. The cost of paying the interest on a new mortgage is 62 per cent lower than paying rent, on average.”
This means that buying still makes financial sense providing you are fortunate enough to have the deposit money, even if you have £50,000-plus of student debt outstanding.
Five tips for getting a mortgage before paying off your student debt:
1. Don’t sweat the big number
For a post-2012 graduate, your student loan statement showing a debt of £50,000 can be terrifying.
But in this case, and ONLY this case, ignore the numbers on the statement.
Student loans are poorly named. They are not loans. What you pay back is entirely dependent on how much you earn and not the amount you borrowed.
In fact, the Institute for Fiscal Studies estimates that 83 per cent of post-2012 graduates will have some or all of their debt wiped before they finish paying it.
So open a box. Put the statement in. Leave it there. Only think of it again if the Student Loan Company writes to you asking for some information.
As for your monthly payments, try thinking of them as a form of graduate income tax.
2. Affordability matters
The Mortgage Market Review put affordability at the heart of any mortgage application.
True, your monthly student loan payment will decrease your disposable income, but it is unlikely to be a game changer for your lender.
Rather, lenders look at your total monthly costs.
If, in addition to your loan payments, you have chunky credit card debts to service, expensive service charges and ground rent, the amount you can raise on a mortgage is likely to be less than if you had fewer outgoings.
3. Use your money wisely
“Affordability becomes tighter the smaller the deposit or the lower your income,” says Alexander Smith, senior adviser at Capricorn Financial.
When you are trying to stretch to the maximum on a mortgage, it can be tempting to overpay on your student loan to boost your disposable income but he also says — don’t do it!
Voluntarily overpaying on your student loan is simply throwing money away.
Even if you are one of the lucky 17 per cent of people who will earn enough to pay off the whole loan, there are often better options if you have savings.
Use your savings to boost your deposit and improve your affordability metric.
Not only will this increase the likelihood of getting a mortgage, it can also help you access cheaper deals.
For example, Halifax offers a mortgage with a two-year fixed rate of 1.8 per cent on a £350,000 property with a 10 per cent deposit.
This rate drops to 1.39 per cent if you have a 20 per cent deposit, a monthly saving of £199.
Alternatively, look to increase your disposable income by paying down your expensive credit card debts.
This will also help reduce your debt to income ratio, another metric lenders often look at when assessing your creditworthiness.
4. Avoid expensive add-ons
Buying a flat with a concierge and a gym might make the living easy but it will also push up your service charge bill above the new-build average of £2,777 per year.
Buying an older flat can knock almost £1,000 off your service charge bill, according to Direct Line for Business.
Buying a “doer-upper” will mean less swank, but also potentially no service charge at all.
This could more than offset your monthly loan payment and increase the size of mortgage you can afford.
5. Take independent advice
When looking for a mortgage, comparison sites are a great starting point but they don’t always give the full picture.
“Some lenders are more sensitive to debt payments and dependants,” says Alexander Smith.
An independent mortgage adviser will help you find the product best suited for you.
“While there aren’t currently any specific mortgage products to help those with large student loans, some lenders do provide professional mortgages,” says Dilpreet Bhagrath.
“A professional mortgage takes into account the earnings trajectory of specific professionals, such as a medical doctor, once they’re qualified as part of the affordability assessment. This may provide a route to homeownership for those who have recently graduated with a large amount of student debt and limited income, but with an increased earnings forecast.”
Apart from choosing the best product, mortgage advisers can also help you pick the most suitable timescale for your needs.
Opting for a 35-year repayment plan instead of the standard 25 will increase the overall cost, but it may reduce the monthly repayments enough to meet the affordability requirements.
Don’t let your student loan stop you getting on to the property ladder.