Many of us have student loans from our days at university. And paying them back can take almost as long as paying back a mortgage. But how do they affect mortgage applications and your chances of getting one approved?
If you’re applying for a mortgage and have been wondering about the answer to this question, wonder no more. We’ve got the full lowdown to make sure you’re in the know when it comes to student loans and mortgages.
Do student loans affect mortgage applications?
You may consider your student loans as a form of debt. And in some ways, that’s correct. You took out loans to pay for your studies and at some point, most people will pay all, or some of them back.
However, in reality they don’t work the same way as other debt. For example, you repay a bank loan over a set period, at a certain interest rate. Student loans don’t work like that. You only start paying them back once you earn over a certain amount. And you only pay a percentage of your earnings above that amount.
In that sense, student loans work more like a tax than a loan. As a result, the way they impact your mortgage application will differ from other forms of debt, such as a car loan.
Student loans don’t generally go on your credit file. Therefore, they won’t affect the outcome of any credit checks that take place as you go through the application process. This is a key factor, as other debts, such as credit cards, could count against you.
It’s still important to be up front about your student loans when you apply for a mortgage though.
Do student loans affect mortgage approvals?
Lenders will be most interested in how your student loans impact your disposable income. However, some will be interested in how much you owe in total as well.
Your disposable income will affect how a mortgage provider views your level of affordability. Providers will consider your income and outgoings to ensure they’re happy to lend you the amount you’ve applied for.
They’ll want to make sure you can afford what you’ve borrowed but can cover things if your payments increase due to rising interest rates. This will of course, be more of a factor if you’re on a variable rate mortgage product.
In terms of affordability your student loans won’t affect your application because they’re debt. However, they’ll reduce your level of disposable income in the same way that other monthly bills would. This is why your monthly repayments are more important than the total amount you owe.
The amount you can afford to pay each month will affect the size of mortgage your provider will approve. In this sense your student loans will influence what level of mortgage you qualify for. However, this will only be as an element of your disposable income, rather than because they’re a debt.
If you’re worried your student loans may affect your affordability, there is a silver lining. As a graduate it’s likely you’ll be earning more than a non-graduate. Or, if you aren’t now, you’ll have a better chance of doing so in future.
So, while you may wish your student loans would disappear, when you consider your earning potential, it’s likely you’re still in a better position than if you hadn’t been to university.
