Mortgages: University debt hits first time buyers


New research has shown just how hard graduate, first time buyers, are hit by the debts built up during their years at university.

New figures from the Royal Bank of Scotland (RBS), have shown that not only will first time buyers with student debt, find it harder to save for a deposit,  the loans will also impact on the size of mortgage they can afford to repay.

Harder to save for a house deposit

The figures from RBS show that student loan repayments will eat up 7% of the disposable income available to a graduate first time buyer, after essential bills are paid.

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Since the credit crunch, first time buyers have had to find ever larger deposits, with most mortgage lenders decreasing the loan to values at which they will lend. This has meant first time buyers have found it harder than ever to get on the housing ladder, which many experts believe has been one of the factors behind the stagnant UK housing market.

Monthly mortgage payments

The Halifax, the UK’s largest mortgage lender, recently released figures which showed the average household in the UK spends 25% of their disposable income on mortgage repayments, the lowest level for 15 years.

However, the research from RBS shows how different that picture is for first time buyers.

According to the bank, first time buyers, with a typical 90% loan to value mortgage, use 40% of their income in mortgage repayments. For first time buyers with a student loan this figure rises to 44%.

New student loan system

The new student loan system will start in this academic year for English universities.

In common with the old system, students will not need to find money up front to finance their higher education. Whilst some safeguards have been put in place to help families with lower household incomes, the new system is likely to mean many students leave university with higher debts than under the old system, with the cap on what can be charged for tuition fees rising from £3,375 per year to £9,000.

Although for many the debts will be larger, the threshold when they must start to be repaid has been increased to £21,000, from £15,795 under the old system.

Once a graduate earns more than £21,000 they start to repay the debt at a rate of 9% per year, with repayments deducted directly from salary.

Whilst this is good news, many students will end up paying more interest under the new system. Under the old system interest was linked to the Retail Prices Index. For graduates earning less than £21,000 this will not change under the new system, however for graduates earning more than this threshold interest will be set above RPI. Meaning that under the new system loans could take longer to be repaid.

Impact of student loans on mortgages

With over 75% of students believing they will leave university with debt, and 60% expecting the debt to be above £10,000, according to research by the Halifax, the impact on the ability of graduates to get a mortgage could be significant.

Graduates are also are also facing the additional burden of rising rental costs, as landlords find they can increase the asking price for rental property in the face of reduced supply and increasing demand.

The combination of repaying their student debt, whilst meeting ever increasing rental costs, might make saving for house deposit unaffordable.

Many first time buyers will hoping that government initiatives such as FirstBuy or the NewBuy mortgage scheme come to their rescue, or that the ‘bank of mum and dad’ remains open for a little longer!