Millennial money: student loan or first home?

The lingering debt can make the difference between getting your own place and staying in the rental sector

“My student loan knocks £40,000 off how much I can get on a mortgage,” my friend said. I nearly fell off my chair. Nearly every young person with a student loan has been indoctrinated by the mantra that the debt is the cheapest you’ll ever have and so does not matter too much — it is worth it, because you need a degree.

Unfortunately that nugget of received wisdom is only half-true. Sure, at its peak the interest on my student loan was 4 per cent, a competitive rate in the world of £10,000-plus loans. Yet the debt does matter, and as long as you’re in a job that pays more than £17,495 (or £21,000 for those who started university after 2012), you will have to put 9 per cent of your salary towards repayments.

Most of us are blithely unaware that when it comes to buying your own home, those monthly repayments can take a chunk out of how much you can borrow. A straw poll of my peers, all squirrelling away money for a deposit, confirms this is the case. The situation is slightly different for the generation who have taken loans of up to £14,000 a year, because they may never pay it off. For people in their early thirties with £5,000 to £10,000 outstanding, it’s a conundrum.

It’s easy to let the student loan take a back seat when you’re trying to save for a deposit. However, banks and building societies have to take into account regular outgoings such as council tax, travel costs and your student loan when you apply for a mortgage. The higher your outgoings, the less they will lend you. That £250 a month on the student loan is £250 that you can’t put towards a mortgage.

For people buying alone, those with small deposits and those without parental help, it can make the difference between getting your own place and staying in the rental sector. “For higher earners, who are paying back £200, £300 or £400 a month, that is a big financial commitment and can easily reduce the amount you can borrow by tens of thousands,” says Aaron Strutt, a mortgage broker at Trinity Financial.

Many finance experts say it is not worth trying to pay down student debt. They argue the interest is low and rises with inflation, so in real terms the debt pile does not increase. If you are canny, you can make more from the interest on several savings accounts than you will be charged as interest on the debt. Moreover, the student loan isn’t taken into account when lenders look at your credit rating.

That is true, but letting the debt linger means you will pay back more, because of the interest.

Repayments depend on which year you took out the loan, but generally someone earning the average wage of £27,000 will have £71.29 deducted each month — a sum that won’t make much of a dent in your bank balance, nor your debt. Keep making the minimum payments and you will still be paying your student loan well into your thirties and forties, when you will be itching to put down roots. If all goes well, you will be earning more too. Someone on £60,000 pays back £318.79 a month.

There are some things you can do. Weigh up whether paying off the debt from savings will help you to save towards a deposit, or get you a larger mortgage, or whether it makes more financial sense to get on to the housing ladder first, and then tackle the debt.

“Pay it off. It will haunt you,” an older colleague said to me six years ago. I now realise what she meant.