mortgages and student debt

[llama]

Hi,

Just wondering if anyone's had any experience with this that they can pass on...

My partner and I are thinking about getting our first mortgage, and wonder what the likelihood is... we both have student loans, totalling around 75,000. They're still interest free, because we're still studying, but 7% will kick in after May 2006. We both have excellent established credit histories, and are free of all other debt. We expect to be earning relatively well once we're out of study.

My questions are:
1. does anyone know how banks consider student loans when assessing mortgage applicants.
2. what is the normal debt servicing ratio range that bank's usually require?
3. any sucess/rejection stories that might help me get an idea of what to expect?
4. anything else i should factor in?

thanks - any advice is really appreciated.

[PC]

$75K Strewth!!!

With that amount of debt - you're both obviously highly trained brain surgeons!
In which case getting a loan will be no problem.

Call a mortgage broker.

[drelly]

1. does anyone know how banks consider student loans when assessing mortgage applicants.
They would be assessed the same as any other debt.

2. what is the normal debt servicing ratio range that bank's usually require?
Rules vary from bank to bank but normally they don't want you using more than around 30% of your income on debt servicing.

3. any sucess/rejection stories that might help me get an idea of what to expect?
You'll be hit with low equity fees if you're borrowing more than 80% of the property's value. As a first time borrower, you're also likely to pay an establishment fee although if you're a "professional" they may wave this if they view you as a good future customer.

4. anything else i should factor in?
If you use credit cards, they will add 5% of the card limit to your debt servicing for calculation purposes.

[llama]

thanks, dave - that's very helpful.

I've heard people say that banks consider govt. student loans differently to other debt, because of their terms (i.e. low interest, no maximum repayment period, extremely low repayments etc.) In effect, student loans work out to be a deferred payment plan, rather than a loan with the usual terms and conditions. Do you think this is accurate, or do you disagree...?

If it's accurate, wouldn't the bank's consideration of the student debt simply extend to the required payments (i.e. they'd factor those into the debt servicing) but wouldn't affect the borrowing power otherwise?

any thoughts would be great...

btw - nope, neither of us are brain surgeons, but we've worked hard to get good educations. That doesn't come cheap these days!!

[drelly]

Well..... yes. I would expect the bank to consider the student loan on the same basis as other loans ie; your ability to make payments and still service your mortgage.

[Chemill]

Gidday llama

Suprising! I am in exactly the same position as you. I have student debt of $43k that's on 7% interest. My partner has 33K interest free.

I have 3 houses now and westpac prety much ignores the student debt. I think it has to do with your minimum student loan payments are based on your income - not sure. Different banks may have a different story, but I've had no trouble with finance so havn't pushed it.

My advice is to talk to the banks and get them to explain how it works and find out how much you can borrow.

Chemill

P.s Just editing on this. I think the bank looks at my net income before doing their fiddling. So the pay I deposit in my bank is after tax and student loan payments - Therefore it indirectly comes into consideration.

[Chemill]

Oh here's one of my success stories:

I puchased my fist rental when I was a student with zero income. I was fortunate to make enough deposit via savings and sharemarket profits. I found a +ve cashflow property and good old mum was kind enough to go on the mortgage to provide the "income". Now that I'm earning she is no longer on the mortgage and she hasn't paid a cent towards it.

This may help you if you find something soon.

Chemill

[Monid]

Our experience was that they did eye up our student loans (I think about $20000) when we were looking at our first rental (They didn't seem to fuss for our own place about student loans, they were too worried about income!)
They did say at first their system rejected us because of debt servicing once the student loan was added in, but our bank manager just reduced the amount of our student loan so that she could approve the loan!

Actually since then we have been racking up as much Student loan as we can and using it to pay down our house as quickly as possible, whilst we are still students it is interest free ($7500 a year living costs is a nice amount to whack off your mortgage especially each!) when we are not, well it looks like the interest rate will remain lower than normal bank interest rate, and that the amount of interest charged is income and inflation adjusted means the govt is a better group to owe than the bank...

Actually thinking about it though since then they have let us go to %80 on what equity they thought we had not including our student loan debt, which is kinda weird.
I wonder if I should ask
...

[llama]

In your experience, will banks consider the $150 living costs as part of your income, if you're holding down jobs also?

thanks

[Chemill]

They didn't consider the $150 for me.

[Monid]

I don't think so, it is after all another debt you are getting yourself into, not really an income.

[NZMtgBroker]

To put everyone straight.
Student loans do form a calcluation in the lenders debt servicing calculation. Repayments on a student loan are based at 10% of salary once a living allownace of $16,500 is taken out. So lets assume you have an income of $50,000 less $16,500 = $ 33,500 x 10% = $3350pa. Therefore the $3350 is allocated into the banks debt servicing. This is the equivalent of a hire purchase repayment of $280per mth or credit card limit $5500. So the size of the debt is irrelevant (one catch). It is the repayment that the bank is more concerned with. The catch is that the debt can affect your net asset surplus and your liabilities exceed your assets by a huge amount. If you only have 5% of the purchase price as a deposit they may consider it too risky. At the other end if you have completed your studies and are qualified with good earning potential they want you as a customer.
The thing that you need to look at is if you are still studying and have minimal income then you have minmal borrowing power.

[cat]

and good old mum was kind enough to go on the mortgage to provide the "income".

I'm glad it worked out for you Chemill but others, make sure you really know what you are doing before you start pulling other people into your plans, especially people who have fewer years to recoup any losses.

There are plenty of stories out there of parents who have suffered significantly because they guaranteed the PI debts of their offspring.

There are also plenty of success stories from people claiming to have made their start with no money down, but when you dig a bit you realise that there was equity used for security - just someone elses. This passes the risk on and also prevents that person from investing further.

I do appreciate that in this situation working alone probably isn't feasible.

[llama]

thanks for all the info, everyone...it's all really helpful!

[Chemill]

Yes, good point Cat.

Using mum as the income was not something I took on lightly.

What benefitted my property was that at the time of purchase - demand for rental accommodation (renting them not purchasing) outweighed the supply. This means I'd have no problem renting it.

I also calculated that it would take over one month of vacancy before I started loosing money. These two facts added up to a low probability of loosing out.

chemill