Student Loan and the Graduate Mortgage
Escalating levels of student loans being taken by students during their studies is becoming an increasingly pressing issue.
Graduates are required to pay back these loans once they begin to earn above a certain threshold. There has been considerable confusion and discussion about how these loans should be dealt with when calculating the amount of mortgage funding that can be obtained and the way in which the maximum monthly payments can be managed.
This issue is unlikely to go away, particularly with the new rules on top-up fees that are increasing the liability of graduates to make monthly payments for some time after graduation.
Impact of a Student Loan on Mortgages
The Council of Mortgage Lenders believes that student loans should not be taken into consideration when calculating the size of mortgage that can be obtained and that the loan should not be seen as a liability against the mortgage amount.
Despite the total amount of debt not being taken into account against the amount of borrowing, many lenders will take the monthly loan repayments against the regular outgoings that are included in the payments that must be met, as well as the mortgage.
For example, if an individual has a monthly income of approximately £2,000 and pays £60 a month towards their student loan, the mortgage provider is likely to take a monthly income of £1,940 as their basis for what would be an affordable mortgage.
Useful Facts about Student Loans
When discussing the impact of a student loan, it is important to appreciate that this only refers to the loans provided by the Student Loan Company and not to the myriad other loans such as ‘career development loans’ that are offered to students by other lenders. These loans do not attract the same favourable interest rates and are dealt with in line with other loans such as credit cards or car loans.
Student loans from the Student Loan Company are repayable at a rate of 9 percent for all earnings over £15,000. For example, if an individual earns £20,000 per year, their annual repayment would be £450 a year (or £37.50 a month). The interest on the student loan is kept in line with inflation and is currently at a rate of only 1 percent above base, which is much better than any commercial loan on the market. In fact, the rate is so favourable that some students take the full loan that they are entitled to and then invest the funds elsewhere.
A large proportion of students now leaving higher education will have substantial loans to repay;
this issue should be carefully monitored with the increasing levels of student debt;
the Council of Mortgage Lenders has advised that the total amount of the loan should not be taken into account but the monthly repayment amounts should be taken into account;
the same rules do not apply to other graduate debts such as career development loans.