How does my student loan impact what I can borrow?

Many first home buyers are still paying off their student loan when they come speak to us about a mortgage.

For the majority of young people, their loan is paid back as a percentage of their salary, and it often takes quite a number of years to pay back.

When it comes to applying for a mortgage, any form of debt affects the amount you can borrow, as it reduces the amount of income you have available to pay back your mortgage. This means credit card debt, personal loans, store cards, Afterpay, and student loans, have some negative impact on how much you can borrow. 

Credit cards have the most impact on how much you can borrow, as a bank always assumes that you have maxed out your card, which impacts your borrowing by a factor of about 4. For example if you have a $10,000 limit on your credit card it will reduce how much you can borrow on your mortgage by over $40,000.  We highly recommend borrowers reduce their credit card limits where applicable, as this will put you in a better situation when it comes to getting finance. 

Student loans are slightly different, as student loan repayments are based off the amount you earn rather than the amount you owe. So therefore, if you have two people who both earn $45,000 per year and one person has a $5,000 loan and one has a $30,000 loan they will still be making the same repayments - it will just take the second person a longer amount of time to pay off their loan.  This means that banks aren’t too concerned about how much you owe on your student loan, it is more about how much you are earning and that you have enough money to pay back  your student loan repayments and there is enough left over to pay your mortgage. 

If income is what is stopping you from getting a mortgage, in some situations it can be advisable to pay back your student loan or other debts, which in turn provides you with more disposable income which can be put towards paying off a mortgage. This is something that we are able to help with. We can advise you as to the right approach for your situation. We base this advice on a number of factors including loan size, other debts, income, and deposit/savings available.

We can sit down with you and make an action plan of how to best deal with debts while also getting you in the best position to buy a home. 

Get in touch with the Loan Market Queenstown, Wanaka & Central Otago team today.