It isn't in the textbook but graduates can stretch to homebuying
Laura Howard looks at special loans for university leavers and young professionals entering the mortgage market
Sunday 01 July 2007
As if finals weren't enough, graduates face another gruelling test as they try to find a well-paid job and get their feet on the first rung of the housing ladder.
A decade of property price inflation has made home ownership a distant dream for many, and this year's crop of graduates can expect an average starting salary of £23,431 - up just 2.1 per cent on last year and the lowest rise for six years, according to the Association of Graduate Recruiters. Although these earnings are not too far off the average UK wage, today's university leavers must cope with soaring levels of student and graduate loan debt, on top of meeting new rent demands and living expenses.
The annual Graduate Survey from Barclays bank estimates total outgoings for someone in this position to be in the region of £15,000 a year - so they are likely to have little income left to save towards a first home.
On the positive side, however, mortgage lenders have been falling over themselves in recent years to help new graduates.
"Quite a few lenders now have mortgage deals tailored for graduates and young professionals," says Rob Clifford, managing director of broker Mortgageforce. "These tend to permit a higher level of borrowing due to the likelihood of greater earnings in future years."
Scottish Widows Bank, for example, allows borrowers under 35 years old with a degree from a recognised UK university to borrow up to 102 per cent of the property value. It will also lend up to five times single salary depending on individual circumstances. "We will overlook student loan debt in this calculation," says Paul Ferguson, a spokesman for the bank.
Under the terms of the Scottish Widows graduate mortgage, a parent can act as a guarantor for any shortfall between the loan required and the maximum the graduate can borrow on their own income.
David Hollingworth at broker London & Country says: "Many lenders offer guarantor facilities but the good thing about the Scottish Widows deal is that it's only the shortfall, not the whole loan [as required by most mortgage lenders], that parents must guarantee, which makes it more workable."
Graduates can also choose to team up with friends to get on the property ladder. Britannia building society's Share to Buy mortgage permits four friends - as long as they are all graduates or professionals - to buy as a group using multiples of at least three times each salary, providing they can scrape together a 10 per cent deposit between them.
For example, four young professionals each on salaries of £24,000 could afford a property worth up to £320,000.
With a 10 per cent deposit, each individual would have to make a monthly repayment of £479.42 (based on Britannia's base rate tracker, charging 6.35 per cent interest) on a £72,000 share of the mortgage.
"This is not too dissimilar to the amount that an individual in London would pay in rent every month, which many people feel is money down the drain," points out Tim Franklin, managing director of Britannia's member business.
Bradford & Bingley is another high-street name offering a helping hand to young professionals. First-time buyers training to become a solicitor, actuary or accountant can get favourable borrowing terms of up to 4.75 times their income - and take out a loan at 100 per cent of the value of the property. To keep repayments low, the mortgage can be extended over 45 years rather than the usual 25. First-timer buyers who are already practising as architects, doctors, dentists, surveyors or vets also qualify for the deal.
By contrast, HSBC's HomeStart mortgage is available to all first-time buyers, who are cushioned for the first three years by paying only the interest on the loan. After this, the deal reverts to a standard capital and interest mortgage.
While HSBC usually caps the loan- to-value (LTV) ratio on its mortgages at 90 per cent, graduates qualify for 95 per cent. The bank is currently offering all mortgage borrowers a choice between a two-year fixed rate of 6.29 per cent, a five-year fix of 6.09 per cent or tracker rates from 6.24 per cent.
With Northern Rock's Together mortgage, you can borrow as much as 125 per cent of the property price whether you are a graduate or young professional. However, the mortgage still carries an LTV of only 95 per cent; the remaining 30 per cent is an unsecured loan (up to a maximum of £30,000).
Interest on both parts of the loan is charged at the lender's rates for graduates - 7.25 per cent for a two-year fix without upfront costs, or 6.45 per cent if you can find a £1,195 product fee, which can be added to the loan.
But, says Melanie Bien, director at broker Savills Private Finance, before you jump into any specialised mortgage deal just because you meet its criteria, compare it with what you could get on the open market in terms of rate and loan size.
"It's also worth opting for a fixed rate to enable you to budget each month," adds Ms Bien, "as you will be taking on a high income multiple."
Further reading: To help keep a lid on your costs, try 'Smart Spending' by Jane Furnival (Hay House, £8.99)
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