Will new student loans stop you getting a mortgage?

6 months ago admin 0

Universities will soon be able to charge up to £9,000 a year tuition, and on the back of this I keep being asked is: “Does this mean a whole generation who’ll never be able to get a house?” The answer’s far from clear cut – for some yes, others no. Let me quickly bash out the pros & cons.

While it’s the main headline, the price rise of tuition fees is but one change among a host – the other major one is graduates will repay 9% of everything they earn above £21,000 rather than the current £15,000, and this too has a huge impact.

The key points are as…

Note: to avoid confusion, none of these changes affect those who already have student loans (for info on that see should I repay my student loan)

  • Student loans do NOT go on your credit file. Student loans are very different to normal debts. I tend to view them far more like a graduate tax that stops once you’ve repaid what you’re borrowed. Unlike normal loans they don’t appear on your credit file; and if you can’t afford to repay it as you’re under the earnings threshold you’re not chased and it’s wiped when you reach 65 (or after 25 years for loans taken since 2006).

In fact, no student loan has ever gone on your credit file (with the technical exception of court CCJs on pre-1998 mortgage style loans), so in that sense it doesn’t hit your ability to borrow. Though of course lenders use far more than just credit file data when they score you applications (see the full how credit scoring works guide) and can (and likely will) ask whether you have these loans.

The Big Positive – disposable income will INCREASE
As I explained in a past student loans blog, under the new system you actually have a higher disposable income.

As the repayment schedule below shows for most around £540 a year LESS is being taken from paypackets.

 Earnings  Annual Repayments  now  Annual  Repayments  under new  system
 £15,000  Nothing  Nothing
 £16,000  £90  Nothing
 £21,000  £540  Nothing
 £22,000  £630  £90
 £30,000  £1,350  £810
 £40,000  £2,250  £1,710
 £50,000  £3,150  £2,610

Thus mortgage repayments will be more affordable not less, so this element should likely improve people’s ability to get a mortgage (see the mortgage guide).

Also it means people will have more money to be able to put aside, in order to build a decent deposit (without which you simply can’t get a mortgage these days).

New student loans have pros & cons on getting a mortgage

The Big Negative – you’ll have bigger student loans for longer
There are a number of reasons people will end up taking much longer to repay their loans

  • The Borrowing is bigger; obviously this means it takes longer to repay
  • You repay less; under the new system repayments are lower so you’ll be in debt longer
  • The interest is higher; the interest is no longer fixed at the rate of inflation for everyone, for some it’ll be higher, meaning the interest will compound so you’ll be in debt longer.
  • Possible repayment penalties; there may be penalties to stop early repayments (as far as I know this is still undecided)

This means in the future some graduates will still have loans to pay off, at a stage where had they studied earlier they would’ve cleared them and that of course is negative for mortgage purposes.

The Overall Impact

I actually suspect the financial impact of the new system on the ability to get a mortgage won’t be that significant. As shown above, competiting factors balance each other out. You can roughly divide it into two camps, though again I think it’s of relatively minor impact, certainly far less than overall credit score and size of deposit…

  • Winners – graduates able to buy within a few years of graduating. As they’d have student loans anyway at this point, the greater disposable income should be a boon to the process.
  • Losers – graduates getting mortgages a long time after graduating. Here, as under the current system they’d likely have cleared the debt, the new bigger loans means they’ll still be repaying, and quite simply having a student loan means less disposable income than not having one.

Actually my biggest worry over this is the psychological one. Many students wait until they’ve cleared their student loans to get a mortgage and you can understand the sentiment why. Of course with people taking far longer to repay in the future, if that continues then there really will be a hit on the mortgage market.