Student Debt and how to deal with it
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Will student debt affect my ability to get a mortgage?
All mortgage lenders will take into consideration existing loan repayments in deciding how much they may be prepared to lend. This may involve various types of credit commitment such as car finance, credit cards and personal bank loans as well as student loans. If a loan has less then 6 months to run, then it may be ignored.
To take a fictitious example (but one rooted in our day to day experience). Sarah is 24. She is a trainee solicitor earning £20,000pa. Her credit commitments consist of:
· £50 per month paid to her student loan.
· £150 on a car loan of £5,000.
· A credit card with an outstanding balance of £2,000.
For each of the loans, the lender is likely to take the monthly outgoing, multiple it by 12 to take the annual amount and then deduct that from her income. Thus, with £200 per month going out on loans this means that her income will be reduced by £2,400 for mortgage purposes. With the credit card balance, most mortgage lenders will take 5% of the balance as the monthly ‘outgoing’ and once again multiply this by twelve, so in this case 5% is £100 and this takes a further £1,200 off Sarah’s income giving her a total income after her commitments of £16,400. This is the figure that most lenders will generally use to calculate what Sarah could borrow.
Thus, it will be seen that it is generally the level of monthly repayment not the size of the debt that will ultimately dictate the amount of mortgage that may be obtained. However, many lenders are now changing to a system of credit scoring to calculate the amount they will lend an applicant and this will often reduce the effects of student loans as these repayments can be held in abeyance if your income falls below a certain level. Indeed, some lenders are prepared to offer quite high multiples of salaries as most twenty-something graduates will be well qualified; have no dependents; be in professional employment or at least in a career with the prospect of rapid earnings growth, and these factors may counter-balance the negative impact of student debt when applying for a mortgage.
Further help
Whatever your situation, the most important point is not to put off dealing with debt if you feel that it is getting out of control. There are various services available for counselling people with debt problems, such as National Debtline:
http://www.nationaldebtline.co.uk/. Alternatively, contact the National Union of Students: http://www.nusonline.co.uk/. The Government offers the following general advice and information on direct.gov for people experiencing debt-related problems.
The material in this article is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions.
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