How Does A Student Loan Affect A Mortgage Pre-Approval?
Many first-home buyers worry that their student loan will hold them back from getting a mortgage. After all, you've done the hard work—years of study, late-night assignments, part-time jobs—and now you're ready to buy your first home… but you’re also carrying a sizeable student loan. So how much does it actually impact your ability to get approved?
The good news is, for most people, the effect is smaller than you might think. But there are some key things to know—especially if you're close to hitting a lending limit.
Two Common Mortgage Hurdles: Deposit and Income
When applying for a mortgage, most buyers face one of two common challenges: either they haven’t saved enough deposit, or their income isn’t quite high enough to support the loan they need. These are often referred to as the “deposit hurdle” and the “income hurdle.”
Your student loan affects the income side of the equation. Once you earn more than the repayment threshold (currently just over $21,000 in NZ), the government deducts 12% of your salary for student loan repayments. The banks take this into account by reducing your “useable income” when calculating how much you can borrow. In simple terms, a student loan means the bank sees you as having a slightly smaller income.
Does the Size of My Student Loan Matter?
Here’s the surprising part: it doesn’t. Whether your student loan is $3,000 or $300,000, the bank treats it the same way. That’s because the repayment is always 12% of your income—never more. The amount you still owe doesn’t affect your monthly commitment, so it doesn’t factor into the bank’s affordability calculation beyond that fixed deduction.
This makes student loans quite different from other types of debt, like credit cards or personal loans, which are assessed based on your total balance and expected repayments. A credit card with a $30,000 limit is a big red flag to lenders; a student loan—even a large one—isn’t.
And since student loans are interest-free (as long as you stay in NZ) and paid through your salary, they’re generally seen as manageable, even by the most conservative lenders.
Should I Pay Off My Student Loan If It’s Small?
If your deposit is strong but your income is holding you back, paying off a small student loan might be worth considering. For example, if you’re just a few thousand dollars short of approval and your student loan repayments are reducing your usable income, paying it off could tip the scales in your favour.
Let’s say you’ve saved a 12% deposit but only need 10% to qualify. In this case, using 2% of your deposit to clear your student loan might be a smart trade-off—because it increases your income and keeps you above the required deposit threshold. But if paying off your student loan would reduce your deposit below the minimum (typically 10%), it’s better to keep the loan and focus on maintaining eligibility.
Should I Save for a Deposit or Pay Extra Into My Student Loan?
This depends on which hurdle you’re currently facing. If your income is sufficient but your deposit is lacking, saving for your deposit should be the priority. That includes building up KiwiSaver and making the most of the First Home Grant if you're eligible.
If you’ve already reached your deposit goal, the next step is to assess whether your income is enough to support the mortgage you need. A mortgage adviser can help you figure this out. If you’re close to qualifying but held back slightly, paying off your student loan may give you just enough breathing room to get approved.
What About Credit Card Debt vs Student Loan?
This is where things get interesting. Credit card debt is far more damaging to your borrowing power than a student loan—even if the balances are the same.
Here’s why: most banks calculate credit card repayments at 3% of the credit limit, not the balance. That means a $5,000 credit card costs you $150 per month in the bank’s affordability assessment. In contrast, someone earning $70,000 pays roughly $500 per month toward their student loan—but that’s still just 12% of their income.
Let’s say you have $5,000 in savings and both a $5,000 credit card and a $5,000 student loan. Paying off the credit card removes a $150 monthly repayment from your budget. Paying off the student loan frees up $500 per month. From a pure affordability standpoint, paying off the student loan gives you more borrowing capacity—but from a financial perspective, the credit card is higher risk due to its high interest (typically 15–20%). So the right move depends on what’s stopping you from getting approved: affordability or financial health.
Now imagine you have a $10,000 student loan and $5,000 in savings. Paying off only half of the student loan won’t change your monthly repayments—they’ll still be 12% of your income. In this case, using that $5,000 to pay off your credit card would improve your lending position more effectively.
Final Word
Student loans aren’t dealbreakers, and in most cases, they’re one of the least worrying debts you can carry into a mortgage application. That said, if you’re hitting an income hurdle and the loan is small enough to clear without affecting your deposit, it might be worth paying it off.
Ultimately, it’s all about understanding where your roadblocks are—deposit or income—and adjusting your strategy accordingly. That’s where a mortgage adviser can help guide your next move.
