Student loans do affect mortgages

A recent post on Lib Dem Voice entitled: Dealing with critics on our own terms – graduate contributions1 has left me cheesed off due to a number of inaccurate statements used to defend the rise in fees. However, the one which annoys me the most is this:

they [student loans] don’t count for mortgage assessment purposes

This inaccurate statement seems to be raised in every defence of the increase in tuition fees. It is true that a student loan won’t appear on your credit record,2 but it will be taken into account when calculating how much you can borrow. The reason for this is that lenders have moved away from simple multiples of gross salary and towards measuring your ability to afford repayments.3 Since loan repayments of any kind reduce your net income, they also affect the affordability of further credit and therefore how much you can borrow.

As a simple example, let’s use the Halifax mortgage calculator, from the UK’s biggest lender for residential property. I’m assuming a single applicant with a basic gross salary of £30,000 and no additional income. Under the previous scheme, the loan repayments were 9% of everything over £15,000 (£112.50/month),4 and the new scheme is the same rate but with a threshold of £21,000 ((£67.50/month). These are the amounts the calculator says you can borrow at the time of writing:

  • No loan: £120,000
  • Old loan: £99,330
  • New loan: £106,436

It’s true that the new loan scheme will have a lower impact on how much you can borrow than the old scheme, but two important facts remain. Firstly, even under the new scheme the amount you can borrow will be reduced – in this example by over 10%. Secondly, the new loans will probably have interest charged at a higher rate,5 so they will take longer to pay off. This means you may be hit multiple times if you want to remortgage or increase the size of your mortgage, whereas under the old system you may have cleared your loan by the time you come to change your mortgage.

In case Halifax was an outlier, I also tried the same example with Nationwide, the largest UK building society. The figures were different but there was still a difference in how much you can borrow based on your student loan repayments.

In conclusion then, if you are trying to defend the rise in tuition fees, please drop the ‘student loans don’t affect mortgages’ defence, because it’s inaccurate and gives people the wrong impression.

  1. Article downloaded on 28th August 2012 at 21:00
  2. Unless you default, in which case the situation is uncertain. However, it’s hard to default if you are employed, since your contributions will usually be taken off your salary before you receive it.
  3. Arguably lenders should have been doing this in the first place, but it took a combination of the credit crunch and the Financial Services Authority to push the issue.
  4. The threshold has increased slightly for the 2012/13 tax year, and is scheduled to increase with the rate of inflation from now on.
  5. The new rates of interest are tiered based on income, but can go as high as inflation + 3 percentage points.

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