I would like some advice regarding my student loan. I only went to university for one year, so don’t have as much debt as if I had completed the full course.
I went to university between 2017 and 2018 which means that I am on the student repayment plan type 2. The interest is currently 7.7 per cent.
I borrowed £9,000 for tuition and my maintenance loan was around £3,000, but after interest my balance is now £17,792.89. Last year, £1108.02 interest was added.
I started my first job with a wage over the repayment threshold in July 2023 and have been paying off £9 per month, the automatically deducted amount, since then.
I’ve also been saving for many years and have finally got enough for a deposit on my first home. However, now I am debating whether this is the best use of my money.
> Read: Why financial experts say you should NOT pay off a big student loan
I have come up with four options. Which is the best?
1) Put off buying a house for now and use my savings to pay off my student loan in full
2) Put off buying a house and pay a lump sum amount into my student loan
3) Continue to just pay £9 per month and buy a home
4) Overpay where I can, as opposed to saving the money
> Read: How long will it take you to repay your student loan on your current salary?
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HOW THIS IS MONEY CAN HELP
Ed Magnus of This is Money replies: Student loan repayments are a problem shared by many young people these days.
The problem was exacerbated in 2012 when fees jumped from roughly £3,000 to £9,000 per academic year.
How much you repay depends on your income before tax and what loan plan you’re on. You’ll then repay a percentage of your income over a set income ‘threshold.’
Those on plan 2 like you, who went to university between 1 September 2012 and 31 July 2023, start to repay their loan once their income is more than £27,295 a year.
All undergraduates, regardless of the plan they’re on, pay 9 per cent of their income over the threshold.
The level of interest has been based on the Retail Price Index rate of inflation (RPI) rather than the Consumer Price Index (CPI), which is more commonly used.
Fortunately, when RPI jumped to 13.5 per cent in March 2023, the Government introduced a cap of 7.6 per cent for all loans. However, that’s a very high interest rate – and certainly more than you can currently earn from a savings account.
It is understandable that to avoid further interest accumulating you would ideally want to pay it off sooner.
But if that means delaying buying your first home, it rather complicates matters.
While the interest may accumulate on the student loan, house prices also tend to rise over the long term, which means that delaying your home buying plans could also end up costing you more in the long run.
For expert financial advice, we spoke to Holly Tomlinson, financial planner at the wealth manager, Quilter and Jack Munday, partner and chartered financial planner at the wealth manager, Saltus.
What the experts say…
Holly Tomlinson replies: Although this query is specifically about a student loan, it represents one of the most frequently asked financial questions: should you clear a debt or buy a house?
Many people face the predicament of not being able to save for a home, without throwing in the added burden of increasing student loan costs.
As a general rule of thumb, we are taught as financial advisers to look at a clients’ needs in an order of priorities, with debts being the first need to address in an ideal world.
In reality many people see a property as their most important financial desire. Not only does it get you on the escalating property ladder, but also eliminates the prospect of paying rent, which many see as money down the drain.
It is important to remember that a student loan it is not like other types of debt.
For example, a student loan does not appear on your credit score – though it can impact mortgage affordability.
Similarly, depending on what plan you are on the debt will be written off after between 25 and 40 years.
When deciding which way to turn, looking specifically at the options you have presented I would consider the following:
1) Put off buying a house and pay off the student loan in full: This is a fantastic option to stop paying interest on a debt that isn’t decreasing.
Especially as the interest rate on the loan is higher than the current average percentage growth of general cash savings accounts and the percentage growth on property in the last 12 months.
2) Put off buying a house and pay off a lump sum of the loan: If you have the funds to clear this student loan in full then this is a sensible option as any money sat in a cash savings account is unlikely to make enough interest to compensate for the 7 per cent interest being applied to the loan.
However, if a partial payment can only be made this would still be sensible considering the same theory.
3) Continue to just pay £9 per month – or overpay where you can – and buy a home: Applying the same theory as discussed before, clearing the student loan as soon as possible would benefit you more in the long run, even though this might mean putting dreams of buying a house on ice for the time being.
A caveat which is sensible to bear in mind is whether you would be paying rent instead of a mortgage if you didn’t buy a property and cleared the loan.
If so, it’s important to consider how much the rent would be and the ‘wasted’ money that would apply in this instance.
It is then possible to work out what would look better on a monthly basis – renting or owning – and if purchasing the house as a priority and clearing the student loan second would work out better from a financial viewpoint.
Jack Munday replies: The most interesting thing about this scenario is that it highlights the importance of behaviours and emotion when it comes to identifying your own objectives and drivers.
In this situation, there is a crossroads of paying off student debt or taking on mortgage debt.
Both are forms of debt, but the vital difference is what is perceived as ‘good debt’ versus what is seen as ‘bad debt.’
The concept of student loans being a ‘good debt’ is typically because they are designed to allow a platform to improve job prospects and earnings.
There is also a common belief that student loans do not affect your borrowing ability, however, this is a bit of a red herring.
It is true that student loans do not show on a credit score, unless you have missed payments, and this is one of the biggest factors with a mortgage.
However, the repayments will be factored into a mortgage lender’s affordability calculations, and at the end of the day, almost all financial objectives and decisions boil down to affordability.
We do not yet know enough about the situation to consider the best outcome, but it’s important to consider:
The reason these factors are important is that mortgage debt is static, while student debt is on a set payment schedule.
Repayment plan 2 means you do not pay until you earn over £27,295 per annum. After that, 9 per cent of your wage above this level will be deducted – sometimes referred to as the ‘uni tax’.
Another thing to consider is whether the individual might take a career break in future. If they did, the student loan repayments would stop but the mortgage repayments would continue.
Repaying the interest on any loan will always ensure the final balance is cleared faster. However, the mortgage versus student loan debate will always be based on the longer term objectives of the individual and how they feel about debt.
They should speak to a professional to discuss this and get specific advice for their circumstances.
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The price of an average house in the UK increased further in January, at the swiftest rate since October, according to mortgage provider Nationwide.
British house prices climbed by 0.7% month on month in January, with a yearly decline of just 0.2%, according to the latest figures from mortgage lender Nationwide Building Society.
“UK house prices rose by 0.7% in January, after taking account of seasonal effects. This resulted in an improvement in the annual rate of house price growth from -1.8% in December to -0.2% in January, the strongest out-turn since January 2023,” Nationwide chief economist Robert Gardner said commenting on the figures.
According to Gardner, the trajectory of mortgage rates is crucial for the housing market, presenting a challenge in 2023 for individuals looking to buy a house.
“If average mortgage rates were to trend down to 4%, this would ease the mortgage payments burden to 34% of take-home pay (assuming house prices and earnings are unchanged),” he said.
“However, other things equal, mortgage rates of 3% (still well above the lows seen in the wake of the pandemic) would be needed to bring this measure of affordability back towards its long run average.”
The current average house price remains £16,000 (€19,000) below its peak of £273,750 (€320,400) recorded in August 2022, a period marked by the impact of rising interest rates on the property market.
However, prices continue to stand approximately £42,000 (€49,000) higher than those observed in January 2020, mirroring the rapid expansion during the pandemic when record-low interest rates increased demand, as reported by the Financial Times.
Saving for a deposit remains a significant challenge for homebuyers, Nationwide said. It estimates that a 20% deposit for a typical first-time buyer’s home now equals approximately 105% of the average annual gross income.
Similarly, people searching for rental properties are facing higher prices because of a high level of competition.
In the last quarter of 2023, the average advertised rents outside London in the UK reached £1,280 (€1,500) per month, marking a 9.2% increase compared with the previous year. This, reported property site Rightmove, represented the lowest annual growth rate observed since 2021.
In England, those with a median household income are spending around 26% on median-priced rented homes. In Wales, it is 23% and, in Northern Ireland, the figure is 25%.
Rightmove’s forecasts for next year suggest a 5% increase in average rents outside London and 3% within the capital.
High inflation and the Federal Reserve’s action to tame it slammed the brakes on one of the hottest housing markets in history, and 2023 will go down as a year where too many buyers had too few houses to choose from. Cautious owners are unwilling to sell, expensive mortgages are pricing out overleveraged buyers, builders haven’t produced enough new construction and everyone involved is playing the waiting game.
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But what will await them when 2024 finally closes the door on this strange and stressful year?
Tight Supply and High Demand Will Still Define the Market — More So If Rates Fall
Bret Weinstein, CEO of Guide Real Estate in Denver, has ranked among the top 1% of Colorado agents for the last 10 consecutive years and has been featured in over 40 national and local publications.
He predicts the supply shortage that has come to define 2023 will carry over into the new year.
“Inventory is going to remain extremely tight,” he said, citing “the golden handcuffs of low interest rates.”
The term refers to the historically cheap pandemic-era mortgages that have been shackling potential sellers to their homes and depriving the market of sorely needed inventory.
“People are locked in and not incentivized to sell their homes,” Weinstein said.
Plenty of others share that view, but Weinstein deviates in thinking that if the Fed offers relief in 2024, which many expect it will, cheaper loans will make the situation worse before it gets better.
“If we see interest rates go down even a little bit, there’s a ton of suppressed buyer demand, so over the next year expect more buyers but still less inventory and equity,” he said. “It’s going to take a little bit until sellers are willing to sell based on having a substantial amount of equity that can help them offset the higher interest rates. So next year, if interest rates go down, expect an explosion of buyers while we still have the problem of low inventory.”
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Reluctant Sellers Will Get Creative
Bruce Ailion is an attorney and realtor with RE/MAX Greater Atlanta. A member of the RE/MAX Hall of Fame, RPAC Hall of Fame and the REALTOR Crystal Phoenix Award recipient, he’s been serving clients since 1979.
He’s well aware that many owners are bound to their current homes by golden handcuffs and can’t afford to sell and qualify for a new mortgage. He’s seen this situation before — and he expects sellers to get creative with solutions like wrap-around mortgages.
“For example, a homeowner has a house worth $400,000 and a loan at 3.25%,” Ailion said. “They want to buy a home for $900,000 with an $800,000 loan. The seller could sell their home to a buyer where the buyer puts 5%, 10%, and 20% down, and they offer seller financing at 7% to the buyer. They keep the 3.25% original loan and earn the spread between 3.25% and 7% on the original loan balance. This spread would be used to pay a portion of the new loan they take out at 7% when purchasing $15,000 a year in interest or $1,250 lower monthly payments.”
Another solution is what Ailion calls “the unintended landlord.”
“Here the owner of a home with a 3.25% loan leases the property out to a tenant,” he said. “The rent earned while maintaining the 3.25% loan is used to pay the interest on the higher mortgage interest rate taken out on the new loan they obtain at 7% when purchasing a new property. Financially this is a better option, but it requires more work and comes with a higher risk.”
Expensive Loans and Inflated Seller Expectations Will Increase Days on Market
Debbie Boggs is an award-winning real estate agent in San Antonio and Austin, Texas, the author of “Marketing for the Staging + Design Industry” and the co-founder of Staging Studio, a RESA-accredited certification training provider, and By Design, a multimillion-dollar home staging company.
Her most surprising prediction for 2024 is a higher average days on market — an interesting bet with buyers primed to snap up houses in a market defined by low supply and high demand.
“We are likely to see an increase in DOM before we see large-scale drops in housing prices,” Boggs said.
High interest rates account for some of her reasoning.
“Today’s buyers simply cannot afford the same home they would have purchased in 2020,” Boggs said.
But seller psychology plays a role, too.
“At the same time, the real estate market has a big recency bias,” Boggs said. “If a seller knows their next-door neighbor sold their home for $800,000 six months ago, that is their benchmark for what they expect to sell their own home for. This duality is likely to increase days on market.”
You’ll See Fewer Agents as a Tough Market Weeds Out the Pretenders
When the good times were rolling, there was no shortage of people looking to get into real estate in pursuit of a quick buck.
“The hot real estate market and soaring home prices of the last three years promised huge commissions for agents,” Boggs said. “It seemed like a golden opportunity for so many. Homes were selling so fast. Agents didn’t need to work that hard to hold deals together because there were always backup offers. Buyers were overlooking major inspection issues or waiving inspections altogether. Being a realtor seemed like fast, easy money, and more than 156,000 people got their real estate licenses in 2021 and 2020 — nearly 60% more than in pre-pandemic 2018 and 2019.”
Today, the money doesn’t come so easily, and the johnny-come-latelys are rethinking their career choices.
“A slower housing market means agents will need to work more hours for every home they sell — and for less money,” Boggs said. “More than 10% of agents quit in 2008 when the real estate market crashed. One big difference between now and 2008 is that there are fewer houses on the market. This means even fewer deals to go around, likely forcing more agents to give up their licenses.”
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