Student Loans and Mortgages

If you're a graduate with student loans looking to buy your first home, you might be concerned about how your student debt will affect your mortgage application. The good news is that UK student loans work differently from other types of debt and are generally viewed more favorably by mortgage lenders.

This guide explains exactly how student loans impact mortgage applications, how lenders assess affordability, and what you can do to maximize your chances of securing a mortgage as a graduate with student debt.

UK student loans are fundamentally different from other forms of debt such as credit cards, personal loans, or car finance:

Student Loans vs. Conventional Debt

Because of these fundamental differences, mortgage lenders generally take a more favorable view of student loans compared to other types of debt. The key factors lenders consider are:

• They don't appear on credit reports: Student loans don't show up on your credit file as a loan, so they don't affect your credit score directly.
• Income-based repayments: Lenders recognize that repayments automatically adjust if your income decreases.
• Lower risk profile: Student loans pose virtually no default risk, unlike conventional debts.

While student loans may be viewed more favorably than other debts, they still impact how much you can borrow:

Affordability Calculations

When assessing how much you can borrow, lenders typically:

1. Calculate your gross annual income
2. Apply a multiplier (typically 4-5x income)
3. Deduct ongoing financial commitments, including student loan repayments

Your student loan repayments reduce your disposable income, which lenders use to determine whether you can afford mortgage repayments. The higher your student loan repayments, the lower your mortgage affordability might be.

Practical Example

Impact Varies by Student Loan Plan

The impact on your mortgage affordability varies significantly depending on your student loan plan and salary:

• Lower salary with Plan 2 or Plan 5: Minimal impact as repayments are small or zero if you're below the threshold.
• Higher salary with Plan 1: Larger impact due to lower repayment threshold and higher monthly repayments.
• Combined undergraduate and postgraduate loans: Most significant impact due to higher total monthly repayments.

Generally, for every £50 of monthly student loan repayments, your mortgage borrowing capacity might be reduced by £10,000-£12,000, though this varies between lenders.

If you're applying for a mortgage while repaying student loans, consider these strategies to optimize your application:

1. Focus on the Deposit First

A larger deposit often has a more significant positive impact than paying off student loans:

• Increasing your deposit from 5% to 10% typically secures better interest rates
• Lenders generally offer more favorable terms with higher deposits, regardless of student debt
• Using savings to boost your deposit rather than making voluntary student loan repayments often makes more financial sense

2. Reduce Other Debts First

Conventional debts have a more significant negative impact on mortgage applications:

• Clear credit card balances, personal loans, and car finance if possible
• Avoid taking on new credit commitments in the 6-12 months before applying
• Lower credit utilization (percentage of available credit used) to improve your credit score

3. Consider a Joint Mortgage Application

Applying with a partner or family member can improve affordability:

• Combined income increases borrowing capacity
• If your partner doesn't have student loans, the overall impact of your student debt is reduced
• Some lenders have specific provisions for professional couples with student debt

4. Explore Professional Mortgages

Some lenders offer special mortgage products for professionals who typically have higher student debt:

• Often available to doctors, dentists, vets, lawyers, accountants, and other professionals
• May offer higher income multiples (up to 5.5x or 6x salary)
• Some lenders discount the impact of student loans for certain professions

5. Should You Pay Off Student Loans Before Applying?

For most graduates, prioritizing a mortgage deposit over paying off student loans makes financial sense:

• Plan 1 loans: Low interest rate (currently 1.75%) means paying these off early rarely makes financial sense.
• Plan 2 loans: Despite higher interest rates, many won't repay in full before the 30-year write-off, making voluntary repayments potentially wasteful.
• Plan 5 loans: With a 40-year term, most graduates should prioritize other financial goals over early repayment.
• Postgraduate loans: Given their smaller size and higher interest rate, these might be worth paying off if you're close to clearing the balance completely.