Planning to buy your first home? You’ve probably already taken a close look at your credit history to work out how this will affect your chances of getting a mortgage.
But there’s one debt that doesn’t affect your credit history – your student loan. So does this mean it will also have no impact on your mortgage application? We take a closer look.
A different type of debt
If you have two loans for £10,000 each and three credit cards with credit limits totalling £30,000, this will certainly have an impact on your credit history. If you’re applying for a mortgage, a lender might decide that you already have too much credit available to you and lending you more would be too much of a burden.
But your student loan might come to the exact same total as the example above, and yet it doesn’t have a negative impact on your credit history.
As a result, it was recently reported that two-thirds of 18 to 35-year-olds believe their student loan won’t act against them when they come to apply for a mortgage. But is this right?
It’s now been over two years since the 2014 Mortgage Market Review and the rules on mortgage lending are far tighter now than they were before the house market crash. Lenders take a detailed look at your credit history as well as your income and outgoings when you apply to them for credit.
And it was in the MMR that it was suggested lenders treat student loan repayments as “committed expenditure”. This means that these repayments should be included by lenders in the affordability calculations they carry out.
Affordability is how much a lender thinks you can afford to pay each month based on what you already have coming out of your account. This affects the size of mortgage you can afford to take out.
The money you have to spend on your mortgage each month is what’s left when things like your utility bills, grocery shopping, credit card and loan repayments, mobile phone contract and travel costs have been taken away from your monthly income. Added to these outgoings will be your student loan repayments.
What can you afford?
It’s important you work out what you can afford to put towards your mortgage each month before you apply (and you can use a mortgage affordability calculator like ours to help you work it out).
This can help you work out what mortgage you can afford to apply for and could reduce your chances of being turned down. When you’re turned down for a mortgage – or any credit – it leaves a mark on your credit history for future lenders to see, and this is something you want to avoid.
When you work out what you can afford to pay towards your mortgage each month, include all of your regular outgoings including your student loan. You should be sure that you can comfortably afford the estimated payments, as these could go up if interest rates change and you’re not on a fixed-rate mortgage.
"You should be sure you can comfortably afford your mortgage payments."
Including your student loan repayments may mean that you can’t afford the mortgage you hoped for. However, this isn’t necessarily a bad thing – it means you won’t be borrowing more than you can afford and then seeing your finances really stretched once you start making payments. Not being able to pay your mortgage puts your home at risk of repossession.
And remember, it’s not only your outgoings that affect how much you can afford to borrow – your deposit has an impact too. The more you save towards a deposit, the less you’ll need to borrow (or the more you can borrow) and this may mean you get a better deal.
So, to sum up, no, your student loan doesn’t affect your credit history, but yes, it does affect your mortgage application. Providing you’re prepared for this, though, it doesn’t have to be a bad thing.
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