Remortgage With a Student Loan

How Does a Student Loan Affect Your Remortgage?

A student loan affects your remortgage primarily through its impact on your monthly disposable income. Lenders carry out affordability assessments to ensure you can comfortably meet your mortgage repayments, and student loan repayments are treated as a committed monthly outgoing that reduces the income available for mortgage payments.

Unlike other forms of debt such as personal loans or credit cards, student loans are repaid as a percentage of your earnings above a certain threshold. This means your repayment amount increases as your salary rises, which lenders take into account when calculating how much you can borrow.

The impact on your borrowing capacity can be significant. For example, if you earn 35,000 pounds per year and are on Plan 2, your monthly student loan repayment would be approximately 98 pounds. Over the course of a year, that reduces your assessed income by nearly 1,200 pounds, which could reduce your maximum borrowing by around 5,000 to 5,400 pounds based on typical income multiples.

However, it is important to put this into perspective. Student loan repayments are generally lower than repayments on equivalent amounts of unsecured debt, and lenders understand this. Most lenders treat student loans less severely than credit card debt or personal loans when assessing affordability.

Your student loan does not appear as a debt on your credit report in the way that credit cards and personal loans do. It is collected through the PAYE system for employed borrowers, which means lenders see it as a deduction from your salary rather than an outstanding debt obligation.

Student Loan Repayment Plans and How Lenders Treat Them

The UK student loan system has several different repayment plans, each with different thresholds and repayment rates. Understanding which plan you are on is important because it affects the amount of your monthly repayment and therefore your affordability assessment.

Plan 1 applies to students who started their course before September 2012 in England and Wales, or who took out loans in Northern Ireland or Scotland. Repayments are 9% of income above the current threshold. The balance is written off after 25 years or when you reach 65, depending on when you took out the loan.

Plan 2 applies to students who started their course on or after September 2012 in England and Wales. Repayments are also 9% of income above the threshold, but the threshold is higher than Plan 1. The balance is written off after 30 years.

Plan 4 applies to Scottish students who took out loans on or after September 1998. Repayments are 9% of income above the Scottish threshold.

Plan 5 applies to students starting courses from August 2023 in England. Repayments are 9% of income above the threshold, and the balance is written off after 40 years.

Postgraduate loans are repaid at 6% of income above a separate threshold, in addition to any undergraduate loan repayments you may be making.

Most lenders calculate your student loan repayment based on the plan type and your current salary, then deduct this from your income when assessing affordability. Some lenders are more generous than others in how they treat these deductions, so comparing lender approaches through a broker can be beneficial.

How Much Can You Borrow With a Student Loan?

The amount you can borrow when remortgaging with a student loan depends on several factors, including your salary, the repayment plan you are on, your other financial commitments and the specific lender's affordability model.

To illustrate the impact, consider two borrowers who both earn 40,000 pounds per year. One has no student loan, while the other is on Plan 2. The borrower with the student loan has monthly repayments of approximately 136 pounds, or roughly 1,632 pounds per year. Using a standard income multiple of 4.5 times, the borrower without a student loan might be offered up to 180,000 pounds, while the borrower with a student loan might be offered around 172,000 to 175,000 pounds.

While this reduction is noticeable, it is usually manageable and should not prevent you from remortgaging in most circumstances. The impact is proportionally smaller for higher earners and those with more equity in their property.

There are steps you can take to maximise your borrowing capacity despite having a student loan. Reducing other debts such as credit cards and personal loans will free up more of your assessed income. Building more equity in your property through overpayments or capital growth will improve your loan-to-value ratio and open up better rates.

Some lenders take a more favourable view of student loans than others. A few lenders may not fully deduct student loan repayments from your income, or may use a more nuanced calculation that considers the fact that student loans are written off after a set period. Working with a broker who understands these differences can help you find the lender offering the highest borrowing capacity for your circumstances.

If you are close to paying off your student loan or close to the write-off date, it may be worth discussing this with your broker as some lenders may take a more lenient view of repayments that are due to cease in the near future.

Should You Pay Off Your Student Loan Before Remortgaging?

This is a common question, and the answer depends on your individual circumstances. In most cases, paying off your student loan before remortgaging is not the most financially efficient strategy, but there are exceptions.

Arguments against paying off early:

• Student loan interest rates, while variable, are often lower than the effective cost of reducing your mortgage deposit to pay off the loan
• The outstanding balance is written off after 25 to 40 years depending on your plan, so you may never repay the full amount
• Money used to pay off a student loan could instead be used to increase your deposit or reduce your mortgage LTV, potentially securing a better interest rate
• Overpaying your student loan does not improve your credit score, as it does not appear on your credit report as a traditional debt

Arguments for paying off early:

• If you have a relatively small balance remaining, paying it off removes the monthly deduction from your affordability assessment entirely
• If you are a high earner whose repayments are substantial, eliminating them could meaningfully increase your borrowing capacity
• If you are on Plan 1 with a small balance, you may be close to repaying it in full anyway, so a lump sum could make sense

Before making any decision, calculate the specific impact on your remortgage. If paying off a 5,000 pound student loan balance would increase your borrowing capacity by 20,000 to 25,000 pounds, it might be worthwhile. But if your balance is 30,000 pounds and you would need to deplete your savings to pay it off, the reduction in available deposit could actually leave you worse off.

A mortgage adviser can help you run the numbers for your specific situation and determine the most cost-effective approach. In most cases, the advice will be to keep your student loan and focus on other ways to strengthen your remortgage application.

Tips for Remortgaging With a Student Loan

Taking a strategic approach to your remortgage application can help minimise the impact of your student loan on your borrowing capacity and the rates available to you.

Know your repayment details. Before approaching a lender or broker, check your Student Loans Company account to confirm which plan you are on, your current balance and your monthly repayment amount. Having these figures to hand speeds up the application process.

Reduce other debts first. Lenders assess all your committed expenditure, not just your student loan. Paying off or reducing credit card balances, personal loans and car finance before applying will have a more positive impact on your affordability than trying to reduce your student loan.

Consider your salary. If you are expecting a pay rise or bonus, it may be worth waiting until this is reflected in your payslips before applying. A higher salary increases your borrowing capacity and can offset the impact of student loan deductions.

Maintain a strong credit profile. While your student loan does not appear on your credit report, other debts and your repayment history do. Ensure all your other financial commitments are up to date and avoid applying for new credit in the months before your remortgage.

Shop around. Different lenders treat student loans differently in their affordability models. Some are more generous than others, and the difference in borrowing capacity between lenders can be significant. A whole-of-market mortgage broker regulated by the FCA can compare options across the full range of available products.

Be honest about your student loan. Always disclose your student loan on your application. Lenders will see the deduction on your payslip, so attempting to hide it will only damage your credibility and could lead to your application being declined.

Think long term. If you are remortgaging onto a fixed rate, consider that your student loan repayments may increase if your income rises during the fixed period. Ensure you have enough financial headroom to accommodate both your mortgage payments and potentially higher student loan deductions in the future.

Student Loans and Your Credit Report

One of the more positive aspects of student loans in the context of remortgaging is their relationship with your credit report. Unlike most other forms of borrowing, student loans do not appear on your credit report as a debt, which means they do not directly affect your credit score.

Credit reference agencies such as Experian, Equifax and TransUnion do not record your student loan balance or repayment history. This means that having a large student loan balance will not lower your credit score or show up as an outstanding debt when lenders check your credit file.

However, this does not mean student loans are invisible to lenders. When you provide payslips as part of your remortgage application, the student loan deduction will be clearly visible. Lenders use this information to calculate your net disposable income, which is the primary way student loans affect your borrowing capacity.

If you are self-employed and repay your student loan through self-assessment, the repayment will be visible on your SA302 tax calculations. Lenders will factor this into their income assessment in a similar way to the PAYE deduction for employed borrowers.

The fact that student loans do not affect your credit score is worth bearing in mind if you are considering whether to prioritise paying off your student loan or other debts. Paying off a credit card balance will both improve your credit score and reduce your committed expenditure, making it a more impactful action than overpaying your student loan in most cases.

Maintaining a strong credit profile overall is one of the most important things you can do to secure a competitive remortgage deal. Focus on keeping all your credit accounts in good standing, using credit responsibly and avoiding multiple applications in a short period.