New research by the Pensions and Lifetime Savings Association (PLSA) has revealed that 64% of the 18 to 35-year-olds it surveyed did not think their student loan would work against them when they apply for a mortgage. In fact, more than half of this age group didn’t even class their student loan as a debt.
And yet, the average student studying at a university in England will graduate with more than £40,000 of debt to their name, according to figures compiled by the association.
Perhaps the reason many do not class this as debt in the same way as a personal loan or outstanding credit card balance is that it doesn’t have a negative impact on your credit history. So, if you have a £40,000 loan outstanding or have managed to build up this amount of debt across a number of credit cards and have failed to keep up with your payments, this would certainly stand against you. But if you have £40k of student debt, it’s not seen in the same way.
However, it seems that some assumed that because their student loan wouldn’t affect their credit rating, lenders wouldn’t consider it when they came to apply for a mortgage. But this isn’t the case – although it used to be.
Changing the rules
In 2014, the Financial Conduct Authority released the Mortgage Market Review (MMR), in which it set new guidelines for lenders to follow to promote responsible lending. In the MMR, lenders were told that they could include student debt in their mortgage affordability calculations.
If you have a student loan, your payments towards it will be classed as “committed expenditure” by the lenders you apply to for a mortgage. This is a payment you have to make and can’t cut to free up cash to go towards your mortgage.
Because student loan payments are now included, it means you’ll probably be able to borrow less now than you would if you’d applied for your mortgage before the introduction of the MMR (which is something to consider if you’re thinking of remortgaging). However, this is not necessarily a bad thing.
Borrow what you can afford
The rules set out by the MMR aren’t there to make borrowers’ lives difficult – they’re there to protect you. If you borrow more than you can comfortably afford to repay, you may start to struggle to cover all your committed expenses and fall behind.
Missing your payments on loans and credit cards will harm your credit history and could open you up to fines. Meanwhile, not paying your tax bill puts you at risk of ‘enforcement action’ being taken against you by HMRC.
And if you can’t afford to pay your mortgage and start to miss your payments, your home could be at risk of repossession. And all because you borrowed more than you could afford.
It’s for all the above reasons that it’s virtually impossible to take out a larger mortgage than you can afford nowadays. This protects you from being unable to afford your mortgage payments, which would put the roof over your head at risk.
If you have a student loan and you’re in the process of looking for a mortgage, make sure you factor your repayments into your budget. Lenders certainly will, and you don’t want to be taken by surprise!
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.