As a student, becoming a home-owner might seem like a while off. The average age for becoming a first-time property buyer is thirty, so whilst you’re partying and studying the thought of getting a first mortgage might not ever cross your mind. In fact, you might not even know what a mortgage is. What you will know, however, is what a student loan is – and how different can they be, really?
Student financing comes in two forms; tuition fees and maintenance loans. Tuition fees cover the cost of the degree and is paid directly to the university, usually costing around £9,000 per year. Maintenance loans are paid to the student, depending on their parent’s income and where the course is to take place. Living in London away from home could amount to over £10,000 a year in maintenance fees. The average, however, is £3,000 per term, which can be used for food, travel, rent, bills, books and more. Once the degree is complete, graduates will begin to repay their tuition fees when they earn more than £21,000 per year, and their maintenance loans once they earn over £25,000 per year. 9% of the total earnings are taken directly from the payslip or tax returns, depending on whether the borrower is self-employed or not.
Future Finance reports that more often than not, students still struggle financially despite receiving this government funding throughout the duration of their study. For many, university is the first time that students need to budget in order to ensure that their money can stretch the term. This then sets them off well for the future, especially whilst in the process of buying a house for the first time or seeking their first mortgage.
Before thinking about a mortgage, many young professionals will have plenty of experience with budgeting for monthly payments. As well as paying rent and bills monthly, a lot of first-time home buyers will have had to account for their student finance repayment coming off their monthly or weekly wages. With this experience behind them, mortgages and the property market might not seem so scary. But how exactly does the student loan process differ from that of a mortgage?
Essentially, a mortgage is loan just like student finance. Usually coming from a bank or a building society, money is leant to the house-seeker with interest in order for them to buy a home. The property remains that of the bank until all the repayments are fully paid – which is usually done at a monthly rate. When first applying for a mortgage, the lender will assess how much the buyer will be able to afford by checking their annual salary and outgoings, such as credit cards and loan debts. Although a student loan may be a hindrance, it will not directly prevent a mortgage being taken out. Credit history checks will also be carried out. Loan-to-value assessments will determine how much mortgage loan is available as a percentage of the property value.
Much like attending university, the more money that is saved, the easier it is. More funds for a deposit will ensure a lower loan from the bank, which means less to repay. However, again like university, there may be hidden costs. In the property market, these may come in the form of mortgage arrangement fees, solicitor’s fees, stamp duty, home insurance and removal costs etc.
As a point of reference, the average deposit for a first-time property buyer is £43,433. The average cost of a house is £217,199, and the average mortgage loan is £173,766. There is help for the cost of houses though, just like government student loans. The Help to Buy equity scheme was set up to help first-time buyers. In the scheme, the government will pay a further loan of 20% (or 40% in London) towards a new build home up to £600,000. This loan is usually interest-free for the first 5 years of repayment.
Again, such as student loans, there are different types of mortgages available. A fixed rate mortgage allows monthly payments to be fixed at a certain amount for the first 2, 3 or 5 years of the repayment program. Tracker mortgages track the bank of England’s base rate, with the mortgage fluctuating depending on that rate. Finally, offset mortgages are available for those who take loans out with a bank in which they have a savings account. Instead of charging interest on the loan, there is no interest added to the savings of the same amount of the payments. Depending on which type of mortgage is taken out the monthly repayments will be different. On average, however, for first-time buyers, the monthly payment is £760.
Similar to being a student, there are ways to help make your finances easier even whilst repaying loans. Joint mortgages are a great idea for couples, in which you can share the monthly payments. As well as this, lenders could offer a higher loan for joint mortgages. Cutbacks could also be made to lifestyle choices. For example, moving somewhere where the rent is cheaper, trying to pay off other debts before applying for a mortgage and getting a side job could all help with financing. Taking time, even just an extra year or so could do the world of good for hopeful property-buyers. Paying for less debt at one time by simply waiting a while longer is often encouraged.
Although they may seem much scarier, mortgages really aren’t so different to student loans. Both require the debtor to pay monthly instalments back to the lender, both depend on a plethora of situations to determine how much loan you will receive, both have different types of loans, and both can be aided by a little bit of forward planning and saving. Having conquered student loans, how bad can mortgages be?