Brokers warn high student loan debt may put off first-time buyers

John Hewitt Jones

August 18, 2016

High levels of student loan debt are putting off first-time buyers coming to the mortgage market, brokers have warned.

A report published by the Office of Budget Responsibility has forecast student loan debt will make up over 10% of the UK’s GDP by the early 2040s.

Recent changes in government policy have resulted in an increase of the figure by 2.5%, according to the study.

Brokers have expressed concern at the high levels of student debt, suggesting the cost of studying is reducing the ability of young people to get on the housing ladder.

In some cases long-term student debt reduces the ability of aspiring homeowners to obtain a mortgage, even when the cost of monthly payments may be less than existing monthly rental payments.

Andrew Montlake, director at Coreco, said: “There are loads of people coming out of university with spiralling debts. It always has a significant effect on borrowers’ capacities to get a mortgage – this is something we see all the time.

“You take into account all their debts, and with the stricter affordability tests, it really is something that has a big effect on the amount young people can borrow. The idea that student debt will make up 10% of GDP is shocking. It’s a big old number.”

Mike Fitzgerald, sales director at Brentchase Financial Services, agreed with the assessment.

“The very first thing we ask young people when they come in is what university they went to, what subject they read, and how much debt they have. It makes a massive difference in what they can borrow,” he said.

“There was a time when lenders didn’t really bother about them. Now they all do, and it changes the calculations. The situation really has shifted over the last years, with affordability requirements getting tighter and tighter.

“It’s silly because if you’ve got a client with a good degree, they are very likely to be able to pay their bills and maintain mortgage payments. Very often the cost of a mortgage will be often be half what they’re paying in debt, so it does make it quite funny.”

Fitzgerald added: “It’s pretty simplistic really. We look at how much a month is taken from your salary to pay the student loan, and the impact of that. I’m amazed I didn’t have any loan at all when I was younger, and now everybody has them.

“10% of GDP is a heck of a lot of money. It’s very high… I don’t know what lenders will do, but I can’t imagine what universities will do either. It’s a real problem.”

Responding to the concerns, a spokesman for the Education Policy Institute think tank highlighted the need for lenders to be sensitive to the needs of students.

“The rising cost of providing student loans is a huge policy issue – it remains to be seen whether the impacts on public debt will be justified by the qualifications and skills it is intended to pay for.

“However, reports of problems for access to mortgages suggest a need to build understanding among lenders and prospective students – many of whom risk being put off gainful study by misconceptions.

“Whilst the Chancellor has been accused of retrospectively changing the terms of these loans, they remain ‘income contingent’ and so create less short term risk for arrears than other items of expenditure: if a borrower’s income falls, so will their repayments, and any debt is cleared after 30 years.”

A spokesman for the Council for Mortgage Lenders said: “Any mortgage will go down to the criteria of the individual lender. If a borrower is paying off student debt and paying for a pension, that will affect their ability to borrow. There is no industry standard for the application process of considering student debt.”

The Coventry Building society also confirmed that student loans were taken into account as part of the society’s wider affordability tests for clients.

Tim Wheeldon, chief operating officer at Fluent for Advisers, also underlined that student loans made up a part of the brokers’ affordability test, adding: “We do have clients who are using second charge loans to pay off a family member’s student loan.”

The UK government has come under pressure in recent months after backtracking on promises made in 2010 that the £21,000 earnings repayment threshold would rise annually with average earnings.

August 2016 saw the conversion of maintenance grants to loans from lower-income households replaced with loans. The increase is only partially offset by reductions following a five-year freeze on the loan repayment threshold from 2016-17.

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