As a mortgage adviser, I hear from lots of first home buyers asking “does a student loan affect getting a mortgage” and they can.
The answer is YES your student loan does affect your ability to get a mortgage, or at least it impacts on the amount the banks will let you have.
With some debts the concerning factor is the balance owing, but with a student loan it doesn’t matter if you owe $2,000, or 20,000 or even $100,000 as the repayment is the same – it’s based on your income not the balance of your student loan.
When the banks look at your mortgage application and what you can afford they look at your income and whatever your living costs are, plus any other financial commitments such as credit cards, loans and of course your student loan.
Even a small student loan can mean you can borrow a lot less!
How Do Banks Calculate The Student Loan Impact?
The interesting thing with student loans is the way that the repayments are calculated.
If you are on a salary or wages and earn over the annual repayment threshold ($22,828 for 2024 tax year) then the amount you have to pay to your student loan each year is 12% of every dollar you earn over the repayment threshold.
For self-employed you still have to pay the same, although your income is confirmed for each financial year and therefore you have the option of paying a lump-sum rather than regular repayments.
Unlike a normal loan, the repayments on a student loan are higher when you earn more as they are based on your income not the loan amount.
Why Have You Got A Student Loan
Obviously people get student loans to pay for their education, so the hope is that once you have that education you can then start to earn more than you might have otherwise earned.
Earning more is good for the fact that you have more income for the mortgage, but also it means that you can pay your student loan off faster.
You might treat the student loan as an investment in your future, but that’s not how the banks see it.
Until your loan is paid off it is still treated by the banks as a liability – a debt.
Refinance Your Student Loan
Have you thought about refinancing your student loan?
It might sound stupid to refinance an interest free student loan to a personal loan where you are paying interest, but when you are trying to get a mortgage it’s all about the repayments and sometimes you can have lower repayments with a personal loan. This is often the case when your income is larger.
As mortgage advisers this is something we always look at.
Last week we had a lady with a student loan with about $24,000 owing, and due to her income she was paying approx $1175 monthly. We did the calculations and by refinancing to a personal loan it reduced the repayments to just under $600 a month and that increased what she could get a mortgage for by another $70,000
If someone has a smaller amount owing then there may be the opportunity to use some savings to pay off the student loan, or to increase the repayments to pay it off faster before the mortgage is needed.
If the student loan has a larger balance owing then refinancing the loan plus any other debts can be a good idea.
It’s important to assess before you do anything, and then make sure that you use the right lender for the new loan.
