Buying your first home is an exciting milestone, but if you have a student loan, you might be wondering how it affects your mortgage application.
In this article we will shed some light on how banks view student loans and give you some ideas to help improve your chances of securing a mortgage.
Understanding Student Loans and Mortgages
When applying for a mortgage, your student loan plays a significant role.
Banks view student loans differently from other types of debt.
They see them as an investment in your education and career advancement – a “good debt” so to speak.
However, your student loan will still affect how much you can borrow for a mortgage.
Interestingly, the size of your student loan doesn’t matter that much to the bank.
Whether you owe $10,000 or $100,000, the calculation remains the same as it’s based on your income.
What matters is your ability to make repayments alongside your potential mortgage.
Once you earn more than the student loan annual repayment threshold, which is $24,128 for the 2025 tax year, you’ll pay 12% of your income towards your student loan.
So the more you earn, the more you will pay – which is great from a debt reduction point of view, but it also reduces your usable income for servicing a mortgage.
For example, if you were earning around $150,000 your student loan repayments would be roughly $1260 per month regardless of your student loan balance.
That’s $1260 per month LESS that we can use to go towards your mortgage calculations.
How much does $1260 per month get you in terms of a mortgage? It turns out to be about $75,000 – which can put a restriction on the type of property you want to buy.
Should You Pay Off Your Student Loan Before Buying a Property?
There are a few theories as to whether it’s better to repay your student loan or not.
If you have the income to borrow what you want for a property AND repay your student loan, then you might think – my student loan is interest free while I’m living and working in NZ so just continue paying it as normal.
On the other hand, if you have a small student loan balance you could use some money from your deposit to pay it off in full, or make additional payments to repay it quicker, which would increase your borrowing capacity and allow you to buy the home that you want.
When you are trying to get a mortgage, it’s all about being able to service the repayments, so if your student loan payments are quite high then there is a school of thought that refinancing your student loan to a personal loan to decrease your student loan repayments could increase what you could get in terms of a mortgage. A few clients have asked us about this and our advice is to make sure you run through this with a Mortgage Adviser, as the personal loan needs to be structured in a way to be able to pay it off quickly and not bear too much in the way of interest costs.
The key takeaway here is to consider consulting a Mortgage Adviser early on in the process so we can provide tailored financial advice and connect you with lenders that suit your profile as a student loan holder.
By leveraging professional advice, you can enhance your likelihood of securing a mortgage and taking a confident step towards buying your first home. Reach out if you need a hand!
Applications for finance are subject to meeting the lenders criteria, terms, and conditions. Refer to our website www.hbmi.co.nz for our Public Disclosure Document.
