Students are renowned for many things – getting drunk, sleeping in late, eating junk food, and, increasingly, struggling to survive financially without taking on a raft of loans, credit cards, and running up a large overdraft.
Even so, lenders and mortgage brokers are keen to attract their business. This is because the situation they find themselves in when they are straight out of college is likely to be very different from where they are expected to be several years down the line. Graduates tend to earn more than people who never went to university – in the UK average non-graduate earnings are 59% those of graduates. They are also more likely to have more high-powered, professional jobs than those who left school at 16. In other words, they are a good business bet.
This is why several lenders are now prepared to lend graduates more than they would otherwise have done if they had not been to university. These lenders agree to high levels of funding on the understanding that graduate incomes will rise sharply in the early years of their careers, so affordability should not be an issue. However, affordability is usually a problem straight after graduation and many graduates are forced to return to the parental home after finishing their studies. Rising tuition fees and living expenses mean that a student embarking on a three-year course this autumn can expect to spend &28,600 for the privilege of doing so.
Despite the hurdles facing first-time buyers, their business is vital for brokers and lenders. And if they are treated well, and helped in their aim of purchasing a home, they are obviously more likely to stick with that broker or lender. One of the most important aspects of being a mortgage broker is building relationships, which is why it helps for brokers to be able to develop a relationship with a client from an early age.
In an ideal world, the broker would then keep the client for many years. If an adviser can help them buy their first studio flat – often the biggest challenge in the current environment – and they are satisfied with this assistance, they are more likely to return for help when they are upgrading to a bigger family home some years later. In the meantime, their grateful parents may also be keen to put business to an adviser who has proven helpful in the past.
Problem solving
Helping graduates is all about understanding their particular needs and finding solutions to their problems – which are different to other types of borrower. One of the main issues is that the significant rise in student debt is making it difficult for graduates to make repayments on their loans and save up a deposit for their first home at the same time.
Even if they do manage to save enough money for a deposit, graduates risk being priced out of the market as prices continue to rise and the property ladder remains beyond their grasp.
With house prices rocketing in recent years, there is an added problem – the amount needed for a deposit is greater than in the past. This particular hurdle is overcome with 100% mortgages, dispensing with the need for a deposit.
But the major stumbling block of not having a deposit is being required to pay a higher lending charge (HLC). These protect the lender should they have to repossess the property but are very expensive for the borrower, especially when they are already strapped for cash. On a 100% mortgage, the typical HLC is 3%. However, not all lenders charge HLCs and it should be possible to avoid them as long as the borrower is prepared to shop around or use an independent broker.
For example, Scottish Widows Bank offers a graduate mortgage where it lends up to 102% of the cost or valuation of the property, whichever is the lower. This is up to 100% of the purchase price plus an extra 2%, which can be put towards the cost of stamp duty or legal fees. No HLC is charged, even if the client borrows up to the maximum amount allowed. HSBC and NatWest also offer graduate borrowers mortgages of up to 100% loan to value.
Another stumbling block for recent graduates is that their initial starting salary does not allow them to borrow sufficient money to afford a property. For example, on the Scottish Widows graduate mortgage, borrowers are allowed up to 3.5 times basic annual salary or joint applicants can borrow up to 3.5 times the graduate’s basic salary plus the second applicant’s basic salary.
But there is a guarantor option that would enable them to sidestep this and borrow in excess of the standard guidelines. This allows parents to guarantee their children’s mortgage. By acting as guarantor, savvy parents are able to help their children beat the rising house price trap and leave rented accommodation behind. It also enables them to increase their choice of property and secure a decent home in a decent area, which would otherwise be out of their financial reach.
The parents, who are individually assessed, act as a guarantor for the portion of the mortgage over and above the child’s earnings, rather than the whole mortgage. Once the borrower is earning enough to cover the whole loan, the guarantor is released.
Lenders offering graduate mortgages usually offer other sweeteners as well, which make it easier for the graduate to get on the housing ladder. Scottish Widows, for example, has further incentives such as a refund of the property valuation up to a maximum of &250 on completion and &150 towards legal fees.
As affordability is likely to be an issue, lenders will also allow borrowers to opt for a part repayment, part interest-only deal on graduate mortgages in order to make the payments more affordable in the early years when money is especially tight. For example, HSBC offers reduced monthly payments for the first three years on its graduate deal: these are interest-only before reverting to capital-and-interest for the remainder of the term. The payments are calculated to ensure that the mortgage is repaid in full by the end of the term.
The downside of this is that the total interest a graduate client ends up paying is higher than with a repayment mortgage. And there is also quite a jump from the interest-only payments to the capital-and-interest payments, so borrowers must be warned about this and be prepared for it.
But going interest-only for a short time does have its advantages. In the early years it will undoubtedly be easier than it would have been if a borrower had opted for a full repayment loan. But conversely with a repayment mortgage, a borrower the guarantee that they will have paid the mortgage back by the end of the term – as long as they make all the payments – which would not have been the case if they had opted for an interest-only deal for the lifetime of the mortgage.
Extra qualifications
There are strict qualification criteria on graduate mortgages. Applicants must have graduated from a recognised UK university and have the degree certificate to prove it. They must be in permanent employment in the UK and not serving a probationary period. Scottish Widows’ graduate mortgage is available to those who are aged between 21 and 35 years, while HSBC’s graduate mortgage is only available up to five years after graduation.
Rates on graduate loans are fairly competitive, although they are not the cheapest deals on the market. Variable rate borrowing starts at 4.94% – a 1% discount for one year, followed by a 0.5% discount for a further year, and a 0.25% discount for the third year. This stepped discount then reverts to the lender’s standard variable rate for the rest of the mortgage, currently 5.94%.
Even if the client is a graduate, it is worth checking non-graduate specific mortgages to see whether there is anything that might be more suitable. Mortgage Express’ Max 130 mortgage offers up to 130% LTV and is designed for first-time buyers, rather than graduates in particular, while Northern Rock Together’s range of deals offers borrowers the choice of applying for an additional unsecured loan of up to 30% on top of a maximum secured loan of up to 95%.
key points
Advisers should build relationships with graduates as they could become loyal clients for life.
Lenders have recognised the value of graduates and often offer incentives to attract them.
Guarantor mortgages allow parents to help their children and advi-sers to build relation-ships with the parents.
