For many students, University provides the very first taste of sweet independence – but it’s just the beginning.
After University finishes, what’s next? For many graduates, it means going back to live with parents while getting started with their future careers but, for others, going back to live with parents isn’t an option.
For the latter bunch, this often means it’s time to move out of the halls and start renting private accommodation or, alternatively, seeking out a mortgage.
But getting your foot on the property ladder is anything but easy, and you’ll probably find yourself asking a few important questions very quickly. To help with this, we’ve prepared answers to a few common questions below.
Will My Student Loans Affect My Eligibility for a Mortgage?
Mortgage lenders look at a number of factors when determining your eligibility, one of which is your debt-to-income ratio. This debt-to-income ratio is calculated by dividing your total monthly debt payments by your total monthly income. The lower the resulting figure, the more eligible you’ll be.
Seeing as your student loans are essentially a debt, they will impact your debt-to-income ratio. However, as you probably already know, student loan repayments in the UK are income-based. This means that they’ll usually only account for a very small fraction of your monthly income.
Therefore, they’re unlikely to significantly impact your debt-to-income ratio. What’s more important is the other debt you might have accrued during your time at University, such as credit cards and student overdrafts. That’s why it’s important to always exercise good money management and avoid taking out loans and debts whenever possible.
What Else Will Affect My Eligibility?
Lenders try to look at your wider financial picture to determine your eligibility for a mortgage. The most important factor will be your credit score. Your credit score is calculated based on how well you’ve managed your money. Things such as defaulting on payments, having a poor credit mix, and having a high outstanding balance will all negatively impact your credit score.
If you have managed your credit poorly, it’s still possible to find a mortgage with bad credit, but you might need to go through specialist brokers and accept sub-par interest rates.
It’s also worth remembering that having some credit isn’t necessarily a bad thing – as long as you’ve managed it well. If you’ve never had credit before, you probably won’t have a credit score, and this will also affect your eligibility.
Your lender will also look at your income. Naturally, the higher your income, the more attractive you are to lenders. In addition to the value of your monthly income, lenders will also look at how stable it is. If you’re self-employed, your income might not be as fixed as someone with an employment contract, and this will affect your eligibility.
How Much Do I Need to Save For a Mortgage?
When you’re coming out of University, the chances are that you’ll have very little savings, unless you’ve been living very frugally and earning a substantial side-income throughout your studies.
This might make it more difficult for you to secure a mortgage, as lenders will usually require a substantial deposit/down-payment. So how much is enough?
Well, most first-time home buyers tend to save around 10% of their total mortgage cost as a deposit. So, if you’re planning on taking out a £100,000 pound mortgage, you should aim to save around £10,000 first.
If this seems like too much, you could also look into government initiatives like the buy-to-let scheme, or alternatively, consider living with family for a year or so first while you save up.