Martin Bamford, a chartered financial planner and chartered wealth manager
Studying at university is increasingly expensive and it is not unusual to graduate with significant debts. Any student debts will be considered when you apply for a mortgage and this can curtail your plans for home ownership, so it’s important to understand the issues.
The cost of servicing a student loan is considered by mortgage lenders when they look at affordability of mortgage debt. Student loan repayments are considered as ‘committed’ expenditure. As a result, the amount you will be eligible to borrow as a mortgage will be lower.
This can reduce the maximum amount you will be able to borrow [but] it’s a broadly positive situation as nobody wants to take on debts they cannot afford to repay.
Professional or vocational graduates could find it easier to secure mortgages as their employment prospects will be higher. Those who have studied law or medicine are viewed favourably by mortgage lenders for having the best future job prospects, as well as rising salaries during their careers.
A recent graduate with large student debts will need to balance the repayment of their student debts with saving for a deposit. One method used to quickly eliminate debts is the ‘debt snowball’ method, which directs all payments except the monthly minimum [debt repayments] to the small debt first, and then works up the list towards larger debts. This is counterintuitive. When repaying, the most expensive debt to service would logically come first, but it can help to give the psychological boost of achievement when smaller debts are repaid quickly and that money is then allocated to repaying the larger debts.
Graduates will also need to balance the time spent on debt repayment with the opportunity cost of waiting to get onto the housing ladder. If property prices continue to rise at historic averages, then time spent off the property ladder could result in missing out on more price rises and seeing the target of home ownership drift further away.
When thinking about your home-ownership plans, it’s important to consider this in the context of your overall financial planning, including the ability to repay student loans and save for the future.