I’ve paid off just over half of my student loan and I’m looking to try and get a mortgage soon.
Will the loan affect my credit score and could this have a negative effect on the loan application?
If so is it better for me to pay it off first before I apply for the mortgage?
Will my student loan affect my mortgage application and should I clear it first?
Rebecca Goodman, of This is Money, replies: Student loans have been talked about a lot recently and last October the government launched a review into the entire system.
This comes as the rate of interest being paid by some students is due to rise to 6.3 per cent in September, almost double the retail prices index rate of inflation.
The government has said it would unfreeze the student loan repayment threshold for some and increase it to £25,000, from £21,000. This means those who started university after 2012 only start repaying it when they earn £25,000 and this is estimated to save graduates around £360 a year.
No further details of the review have been announced yet, and if you’re paying off student loan debt you may be wondering how this affects your credit score and your ability to borrow money.
Student loans are not viewed in the same way as other debts, such as a credit card or personal loan, and therefore they are not included in your credit score.
However, potential mortgage lenders will usually ask if you have an outstanding student loan, as this could affect your ability to make your mortgage loan repayments.
Similarly for some students whose loan repayments aren’t taken automatically from their wages, if they were to miss a loan repayment this could affect their credit score.
James Jones, spokesperson for Experian, explains: Student loans taken out since 1998 are usually collected through the tax system and do not feature on credit reports, which means they won’t have an impact on your credit score.
However, if you’re currently repaying any type of student loan then this will affect your disposable income. Consequently, your regular loan payment is likely to be factored into in a mortgage lender’s assessment of whether you can afford to service a mortgage, both now and in the future.
Student loans taken out between 1990 and 1998 are not collected through the tax system and operate more like regular unsecured loans.
Student loans taken out between 1990 and 1998 are not collected through the tax system and operate more like regular unsecured loans
While these loans are also not routinely shared with credit reference agencies, if these loans ‘default’ – when payments are due but are not made for several months – then they can be shared with the credit reference agencies.
Where this happens, the default would be included on the borrower’s credit report and be visible for six years from the default date.
Naturally, defaults are very bad news for credit scores and make securing a mortgage much more difficult, certainly at a competitive rate of interest.
There are several specialist lenders who will accept borrowers with a poor credit history and a whole-of-market mortgage broker would be well placed to help find a suitable deal.
Assuming your student loan was taken out after 1998, there’s no risk of it damaging your credit score. Paying off your student debt early would certainly leave you with more spare income, which may be attractive to a mortgage lender.
But you should weigh up your other options too, especially as student debt is relatively cheap compared to many other forms of borrowing. Perhaps you have more expensive debt you could repay such as an overdraft or credit card.
Alternatively, you could use the money (that you would have used to repay the loan) to put towards a bigger deposit on your new home. Doing this would reduce the loan-to-value ratio of your mortgage and could unlock cheaper deals. Again, a good mortgage broker can help you choose the best option for your individual circumstances.
Rebecca Goodman, of This is Money, adds: If you are paying off your student loan and thinking about a mortgage, it’s worth weighing up all your options first.
If you’re managing your student loan repayments well and this isn’t affecting your overall income negatively, it is likely to be better for you to continue paying it off – rather than clearing the debt.
This money could then be used to put towards a bigger deposit for your mortgage, which in turn could reduce the interest you pay on the loan, or it might be better served clearing off more expensive debts if you have them.