University is a big deal. For a lot of students, it’s a first real taste of freedom. Moving out of your parent’s house means you can pretty much do as you please. Pizza for breakfast? Who’s stopping you? Going out drinking instead of completing your assignment? You only live once, right?
Getting the keys to your first place is a special moment. Living independently is great until the bathroom has damp stains for the eighth time and your landlord won’t fix it. After graduation, no one wants to go back to living in student digs. The alternative, moving back in with your parents, isn’t much better either. However, the fact of the matter is that there isn’t much choice for the current generation of graduates.
The Problem
With houses in London racking up an asking cost of more than £500,000 and the rest of the UK coming in at around £260,000 for first-time home buyers, the odds of young people saving enough for deposits in the current climate aren’t good. The Housing Crisis, in which prices for homes in 2014 were rising by £260 daily, is getting worse year-on-year. This, added with the estimate that university course fees will increase to £10,000 per year by 2020, is leaving graduates with a lifetime of renting on the horizon.
It is well known that students undertaking a further education degree at a university in the UK will be repaying their loans for almost the entirety of their working life. Although graduates will not have to start repaying their loans until they earn £21,000 a year and the loan will be wiped 30 years after the completion of the degree, the 6.1% interest rate on student loans is not setting graduates in good stead when hoping to move onto the property ladder.
This somewhat hidden interest fee on student financing can amount to around £8,000 on top of the initial fees. Students in England have the highest academic debts in the whole developed world. As a comparison, the average student leaving university in Britain is likely to have a debt of around £50,000. On the other side of the Atlantic, in the US, students have a staggering lower average debt of $36,000 (£28,000) upon completion of their degree.
From this, it is estimated that three-quarters of graduates will never fully repay their student loans. Of those in debt, around two thirds will not be able to buy a house, even once they reach their thirties or forties. With the average age of a first-time home purchaser being thirty, this is worrying for the next generation of hopefuls.
Mortgages can be a great way for young people to get onto the property market. However, student loans can affect chances of attaining mortgages. As repayment of student financing is often lengthy and large sums of money, home-buying processes can be affected. Mortgage providers will look into personal debt-to-income ratios (the amount you earn versus the debts you will be paying) and could decide that adding a monthly mortgage payment on top of student loan repayments will be too much for your income to tackle.
With this in mind, student loans cannot stop you getting a mortgage altogether. Lenders will also look into how much you earn, your expenditure, other repayments and also how much you’ve saved for a deposit to determine your mortgage amount.
The national average wage in the UK is around £26,500 a year. If a graduate is to make this much, they will be required to start paying their monthly student loan repayments. The current rate is 9% of the wage, which for those with an employer will be taken straight from their payslip. For the self-employed, theirs will be paid along with their tax returns. For most first-time buyers, 20% of the asking price is required as a deposit on a house. The rest can then be paid monthly in the form of a mortgage. On average, the cost of such 20% in London can be up to £100,000 and £53,000 in the rest of the country. So, not only can having a high student debt hinder chances of gaining a mortgage, to begin with, but repayments of the loan can seriously affect the progress of new buyers saving for a deposit.
How Did This Happen?
The question that many graduates and hopeful first-time buyers may ask is; how did the situation get this dire? Previous generations managed to receive 100%, if not 95%, of a mortgage meaning they simply had to pay the monthly instalments and could avoid saving for years for a down payment. Whilst this was helpful for those previous, it is making the current situation worse. As mortgages were easier to attain and without high deposit fees, home-owners could buy more properties and rent them out to the younger citizens. This forced the cost of homes to rise, whilst the cost to rent decreased.
When combining this with the fact that universities never used to charge any kind of fees, the rise in housing costs and the continuing struggle for graduates to buy homes now compared with a few decades ago begins to make sense.
The Solution
So, what can we do? Firstly, a decrease in university fees would be suitable. If students had less to repay, they could save more for a down payment on a house. Higher percentage mortgages could aid first-time buyers with housing fees, as well as decreasing the amount of interest on both student loan repayments and mortgage repayments. Many young people may avoid attending university altogether in the end, unless changes are made. Let’s not settle for renting – a house is only made a home once you’ve paid for it, right?
