2

I've had a search around and there is a similar question here and maybe here. However, I think this use-case is slightly different (not to mention those answers are US based), and also the answer to those questions were "yes" and "maybe" without any figures to back it up. So I'll post my question in the hope of someone who has more insight into the mortgage market (preferably in the UK) can answer using figures.

Let's say I have a student loan of £20,000 and my partner has one of £30,000. We are about to get a mortgage for a house worth £325,000. My partner has been offered to have their student loan paid off by their parents.

The interest on the student loan is 1.25% and the repayments per month for my partner will be around £200 per month on that £30,000.

My question is: Is it worth putting that £30,000 in a reasonably safe portfolio (and let's say hypothetically making 5% on it) or is it worth paying the student loan off? Of course if we weren't paying for a mortgage, then there would be no point paying it off as the student loan interest is far lower than what we would make through investment.

However, I'm wondering whether the negative affect on the mortgage, i.e. affecting the monthly payments such that the interest gained through keeping the money in an investment would be offset by having to pay the mortgage lender more in the long run. Is this a realistic worry?

  • Are they recent-ish student loans (last 15-20 years) where the repayments are taken from your pay? – Ganesh Sittampalam Apr 16 '17 at 16:15
  • And what mortgage rate are you expecting, and what deposit do you have (apart from the £30,000)? Could you use that 30K for a larger deposit and thus get a better rate on the whole mortgage? – Ganesh Sittampalam Apr 16 '17 at 16:16
  • Yes - well we currently are aiming for a 15% deposit (the £30,000 to pay off the student loan is on top of that). – Rambatino Apr 16 '17 at 16:17
  • And yes, recent student loans (2009 onwards) – Rambatino Apr 16 '17 at 16:17
8

You have 1998-2011 income-contingent student loans, where the interest rate is the lower of (1% + base rate) or RPI (retail price inflation). For the next few years the it's likely to be (1% + base rate) as interest rates stay low and inflation shoots up.

These loans only need to be repaid in proportion to your salary, and if they aren't repaid for long enough (e.g. the holder takes a career break for children) they are written off. So all-in-all, they are pretty good debt to have: low interest rate, and you might not have to repay them ever.

It's likely that your mortgage will have a significantly higher rate than the student loan, so you'd be better off reducing your mortgage. Also, the higher deposit might mean you can get a lower interest rate on the whole mortgage because the lender will see you as a lower risk, so the return from "investing" it in your mortgage would be even greater than the raw interest rate.

Having the student loan outstanding might make some difference to the "affordability" check for your mortgage payments, but lenders will be very familiar with how they work. Reducing your mortgage payments with the higher deposit should easily counterbalance that.

Your own suggestion is to invest the £30K in a "reasonably safe portfolio" making 5%. There'll inevitably be some risk in that - 5% is a relatively high return in today's climate - but if you're willing to take that risk, you can investigate the effect on your mortgage to see if it's worth it or not.

  • 1
    Hmm so putting that 30k towards the mortgage is a better option? – Rambatino Apr 18 '17 at 11:40
  • @Rambatino almost certainly IMO, but run the numbers for a mortgage with and without the 30k to be sure. – Ganesh Sittampalam Apr 18 '17 at 14:55
  • I agree and lucky you to be in such a position – Andrew Day Apr 26 '17 at 10:27
3

Simple rule for UK student loans.

Never repay early.

(http://www.moneysavingexpert.com/students/student-loans-repay)


Summary

  • They are not real debt: only payable over threshold and wiped after 30 years (ish). They do not appear as debt with Credit Agencies.

  • If you have other debt, it is almost certainly at a higher rate or worse terms and should be paid off first

  • If you don't have debt, then you can put the cash to better use: whether saving, mortgage deposit or avoiding worse debt in the future.

  • I have added a summary. Though the simple rule is the key. There is already a good answer that explains the logic, but is not clear about the conclusion. Which is that it is never a good idea to pay off a UK student loan early. Equivocating only adds doubt into people's minds. – Mark Perryman Apr 18 '17 at 13:51
  • 1
    Not all student loans are the same. "wiped after 30 years" is not accurate in OP's case. We know from the interest rate of 1.25% and the dates mentioned that it's a "Plan 1" loan. Depending on when the first loan was taken out, it will be cancelled in either 35 years (loans taken out in Scotland), 25 years (first loan taken out in the rest of the UK during or after academic year 2006/7), or when the borrower reaches 65 years of age (first loan taken out in the rest of the UK during or before academic year 2005/6). – CactusCake Apr 18 '17 at 14:06
  • Absolutely, not all loans are the same. All of which is very interesting and entirely irrelevant to the conclusion. It is really important that the message is clear otherwise people will throw money down the drain. – Mark Perryman Apr 18 '17 at 14:15
  • 1
    I don't disagree with your conclusion. The summary may have been misleading is all, the edit is an improvement. – CactusCake Apr 18 '17 at 14:34

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .