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You want to buy a house, but have student loans or an ex-partner taking half your pay check every month? This might severely impact your purchasing power, more than you might realize. Read on to find out more!
One of the greatest disservices you can do a man is to lend him money that he can’t pay back.
– Jesse H. Jones
This article is part of a series on the basic variables important in a mortgage:
- Loan amount
- Loan term
- Mortgage types
- Fixing the interest rates
- Tax benefits
- Mortgage insurance
- Other obligations (loans, alimony)
I will of course attempt to include as many different financial philosophies along the way, although this is a topic where I cannot avoid regional specificity when it concerns rules and regulations that apply to various parts of this discussion.
When calculating the amount you can loan for a mortgage based on your loan-to-income, the presence of previous loan can really put a stop to the party. Depending on what kind of loan you’ve taken in the past it can really add up quickly. Let’s start with how student loans can affect your ability to borrow money for home. There is no way of making it more fun – there will be math involved.
It used to be in the Netherlands that your student scholarship was turned into a ‘gift’, that no longer needed repayment, if you would get a degree within 10 years. This system build was significantly however altered in 2015 with the replacement of a grant and loan system with only a student loan system. Basically, going more towards an American system just as Dutch health care had done a few years earlier, perhaps I’ll talk about the Americanization of the Netherlands (financially speaking) more in a future post.
This, of course, led to more students needing a student loan in order to be able to afford to get a bachelor’s and/or master’s degree. As a ‘compensation’, student loans that were forced onto students from 2015 onwards were counted in a lighter degree on a credit score compared to students who took a ‘voluntary’ (although often still heavily needed, but definitely not always) student loan in the prior years.
Student loans affect the monthly amount that can be spent on the mortgage – with the old system (prior 2015) requiring 0.75% of the original amount (independent of the current outstanding balance) to be deducted. As an example, a 10,000 debt would in this case reduce the monthly availability by 75.
In the new system (2015 and onwards) the same goes, but with only 0.45% to be deducted. In the same example leading to a reduction by 45.
This doesn’t seem like much – but on a 30-year mortgage, with an interest rate of 1% this means that with a 10,000 debt obtained prior 2015, your maximum mortgage is reduced by 23,318, while in the new system there would be a reduction of ‘only’ 13,991 – a difference of almost 10,000!
Any other loan besides the student loans count under the category of ‘other loans’ – which similarly deducts an amount from the available space to borrow. However, any other loan needs to count for 2% of the outstanding balance. Meaning, in the example of a loan of 10,000 a reduction of 200 per month or on a 30-year mortgage with an interest rate of 1% a reduction of 62,181 from your total available loan.
Whereas loans deduct based on the amount you can afford each month, alimony actually changes the gross annual income used to calculate your loan-to-income – and it works both ways! Paying alimony will reduced your gross annual income used to calculate how much you can borrow, whereas receiving it will cause an increase. Whether you should allow alimony to increase your obligations to the mortgage lender is another topic. The full financial consequences of a divorce will also be touched on in a later article.
Does it suprise you how much your mortgage is impacted by (student) loans? Share our thoughts on whether these conditions are fair.
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