Should I pay off a student loan before getting a mortgage, given I have a large deposit?

Question

I live in the UK, and have a ~£15K student loan that I started in 2007.

That means that I pay extremely low interest on it (lower value of "RPI" and "Base Rate + 1%") and that I only ever pay it out of my salary, and then only if I'm earning above some threshold (somewhere in £15-20K pa, I think?). Notably this means that if I lost my job I would not have to continue paying back the student loan (until I got a new one).

I also have a very large sum available as a deposit (~£100K).

I am currently earning ~£40K pa.

Unfortunately, I also live in London, which means that despite all this I'm going to be very hard-pressed to buy anything bigger than a cupboard.

My question is this:

Should I continue paying the minimum payments on my student loan, or should I "spend" some of my deposit capital in order to pay the loan off?

I would expect paying the loan off would increase the mortgage amount that I can get, but will it increase it by more than the amount of the loan?

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EDIT

Answer for my personal circumstances identified

As predicted by various people the answer comes down entirely to how different banks run their "affordability tests", and that appears to vary wildly.

* * For me * *, right now (Mid- to Late- 2015) the answers from the banks I talked to were:

• Santander: Almost no increase in max loan if pay off S.L.
  • => Don't pay off under any circumstance.
• Nationwide: Substantial increase in max loan value if pay S.L. (increased by twice value of S.L.)
  • => Probably pay off if I need the extra loan value, but check effect on LTV.
• TSB: No increase at all in max loan if pay off S.L. however, this seemed to be because they were weren't taking the S.L. into account at all. Their offer with S.L. NOT paid off, was ~= to other banks' offers WITH S.L. paid off.
  • => Don't pay off under any circumstance.

Hope that's valuable to someone.

Answer 1

Should I continue paying the minimum payments on my student loan, or should I "spend" some of my deposit capital in order to pay the loan off?

The way the student loan system works here in the Uk is more like a system of taxation than a loan. It's effectively the wrong name when it is seen as a 'loan'. You have to be earning above a certain amount to then be asked to repay.

Due to these restrictions, it is possible that you may not repay all of the loan before the 30-year statute occurs and the (remaining) debt is wiped clean.

For that reason alone, I'd never advocate paying the loan off early for someone with an income in your range. Now, if you suddenly begin to earn 100k+, then it maks sense to clear the debt off and free up the near-9% of your salary they'd be taking.

I would expect paying the loan off would increase the mortgage amount that I can get, but will it increase it by more than the amount of the loan?

This isn't as straight-forward as you'd think. And for that reason the other post contained some mis-information. Student loans don't appear on your credit file. However, a mortgage lender will look at your circumstances and see how much of a monthly payment you can reasonably afford - at current interest rates and at higher rates. This is known as the 'affordability test'.

I also have a very large sum available as a deposit (~£100K). I am currently earning ~£40K pa.

Therefore, even with your very generous deposit, you may be able to afford the deposit for a £500k property but you'd not get the mortgage for the rest as you couldn't afford the monthly repayments on your salary. You could then use the money to buy a place with a lower loan-to-value. 100k off a £500k property means loan-to-value of 100:500 or 20%. If you got a £250k place (100:250 or 40% ltv) then the monthly repayments would be much lower. I know it's London so somewhere in the middle is more than likely. And even then it'll be a modest place.

Anyway, find out what amount you can borrow based on the expected monthly repayment. Then calculate what property value that means if you paid a deposit of 10%, 15%, 25% or even 40%. You'll then build up a picture of monthly affordability versus property price ranges. You'd then be able to start house-hunting. A mortgage broker would be very helpful to achieve a good deal on mortgages and also offer their financial expertise in narrowing down your calculations.

Last point from me. You may find that you put a 25% deposit down on a place, get a mortgage that has a comfortable monthly repayment for you - and be left with money in the bank from your 100k. There's nothing wrong with that. You could look at an offset mortgage to put that money to beneficial use without losing access to it. Even then though, I'd still not look to pay off the student loan. Think of it as a graduate tax that you pay back from your salary. One day, the tax will stop. Until then, don't overpay if you don't have to. And always look to keep some rainy day money aside regardless of your outgoings - 4 to 6 months worth of living expenses ideally.

Go slowly. You're in a good financial position and have lots of options open to you. Paying £500-1000 for professional help (mortgage broker, IFA) wouldn't be the worst decision you ever made.

Best wishes!

Answer 2

I would expect paying the loan off would increase the mortgage amount that I can get, but will it increase it by more than the amount of the loan?

I'm not sure it makes much / any difference, when I last spoke to someone they ignored my student loan. They may take it into the equation when looking at your outgoings, but I don't think they could it in the same was as having say £15k on a credit card.

I would think having more as a deposit would be the best way to go.

The student loan interest rate is so low (probably lower than your mortgage) it would make much sense to pay off the lower cost borrowing first.