James Cotton is a mortgage specialist at London & Country
First-time buyers have it tough. The price of the average house in the UK has doubled in the past few years and while this is fantastic news for home owners, their children are wondering how they will manage to get on the housing ladder.
The plight of first-time buyers and the fall in the number entering the market has been an obsession in the mortgage industry. There have been many column inches, debates and of course product launches focussed on this group of people, all suggesting ways they can get a foot on the property ladder.
The spotlight has fallen specifically on graduates, but the problems they face are no different to those faced by other first-time buyers in that they are unable to afford a suitable property based on their income and they have little or no deposit.
Research by Scottish Widows suggests that two out of three graduates under the age of 30 still don’t own a home and one in 10 say they can’t imagine ever getting on the property ladder. But non-graduates are unlikely to be much more optimistic, so why are some mortgage deals exclusive to graduates?
The reason seems to be based on the assumption that graduates have higher future earnings potential than non-graduates. But it is important to remember that many graduates are now leaving university saddled with huge debts. Figures from Barclays suggest the average graduate starts off with debts of 13,500.
As far as student debt is concerned, it is essential that graduates approach lenders that will take their commitments into account when arranging a mortgage, although any lender should take a prospective borrower’s existing outgoings into account as standard practice.
Existing debt reduces a person’s net disposable income and will restrict the amount they can borrow. This is the case whether the debt is a graduate loan, personal loan or credit card. And the assumption that graduates have considerably greater earnings potential than non-graduates is open to debate. The Economic and Social Research Council says there are two million students in higher education in this country. There are 112 recognised universities offering thousands of degree courses.
So what is a typical graduate and what exactly is their earning potential?
The government suggests graduates can expect to earn 400,000 more in their lifetimes than non-graduates. This earnings premium was highlighted in 2001 as a way of enticing more people into further learning and Fto help pass the Higher Education Bill.
The government has set itself a target of getting 50% of young people into higher education by 2010. The current level is 44%. An additional 400,000 is a substantial amount and one that could make 13,500 of debt worth taking on initially. But many argue this figure is flawed for a number of reasons, and does not take into account the future climate for graduates.
First, it is simply a snapshot taken in 2001 and based on people who have been in the labour market for some time rather than a forecast for new graduates. Second, it makes no distinction between the tens of thousands of degree subjects and combinations now available. Try comparing the career and earnings potential for someone with a degree in surf and beach management from the Swansea Institute of Higher Education with someone holding a BA in tourism and astronomy from the University of Hertfordshire – not an easy task.
Economists from the University of Swansea have suggested that the graduate premium is more like 150,000 and graduates of some subjects such as the arts could even face a loss.
Even if a graduate will enjoy considerable salary increases in the future, this does not solve their immediate problem of being unable to afford a property based on their current income. If their salary does increase in the future – and assuming any debts have been reduced or paid off – they should then be in a position to remortgage to a standard deal and take advantage of the most competitive rates.
The idea of a single graduate premium is too crude and simplistic, as is the idea of the differentiation between graduates and non-graduates. It is important lenders and advisers look beyond the label on a product and focus on the individual needs and circumstances of borrowers.
Most first-time buyers need two main things when getting a mortgage – the ability to borrow more than standard multiples will allow and the ability to borrow a high LTV due to the lack of a deposit. The needs of graduates are no different. Many lenders offer deals designed to fit these requirements but not all are labelled specifically.
A host of lenders offer borrowing up to or even beyond 100% of the property price,including Northern Rock, Coventry, Bank of Ireland and Bristol & West.
And lenders such as Halifax and Alliance & Leicester use affordability models that often allow higher borrow”It is important lenders and advisers look beyond the label on a product and focus on the needs and circumstances of borrowers”ing levels than traditional multiples, especially for those with debt commitments. Scottish Widows’ graduate mortgages offer borrowing up to 102%. Its standard income multiples are no more lenient than most other lenders – 3.5 x single income – but it will accept guarantor applications. Bank of Ireland and Bristol & West will also consider guarantors on First Start deals and lenders such as Nationwide, Cheltenham & Gloucester and NatWest accept guarantors as standard. Anyone contemplating the guarantor route should bear in mind that it is designed to be a short-term solution. A lender will want to see the potential for the buyer to take full responsibility for the mortgage in the near future, based on the assumption about graduates having more earning potential.
Avoiding higher lending charges is also an important factor for those buying with a small deposit. Any lender serious about targeting first-time buyers – graduates or not – should offer a range of products free of HLCs.
Rather than distinguish between graduates and non-graduates, some schemes target those from certain occupations. For example, Scottish Widows and Standard Life offer mortgages for professionals. The occupations chosen are ones that attract above-average earnings and rapidly increasing earnings in the early stages, such as solicitors, accountants and vets. These are traditional graduate-only careers that require lengthy training and are likely to remain so.
Selecting certain occupations in this way is more accurate than the label of graduate as it is easier for comparisons to be made between occupations. But any number of professions could be selected as offering higher earning potential. For example, it might make just as much sense to offer specific mortgages for plumbers and electricians as these professionals become more scarce and better paid.
The reality with niche products such as graduate and professional deals and 100% mortgages is that while they may be able to help a select group of people, they will not do enough for the majority of first-time buyers. For many, the only chance they have is help from their parents or from government schemes such as Key Worker Living or shared ownership.
There are also social changes occurring that affect the way first-time buyers enter the housing market. The traditional assumptions that university is the best path for school leavers and that home ownership is paramount do not fit with everyone. With the financial strains that a degree course places on people along with the fact that job prospects for many graduates are not as promising as some suggest, many people choose to start their working lives earlier.
As far as home ownership is concerned, renting is an appealing option for many – not just as a temporary solution but as a lifestyle choice. Recent research by GMAC-RFC found eight out of 10 non-home owners prefer renting because it means they do not have to make a long-term commitment to a property or area. And six out of 10 said they were comfortable with delaying a property purchase until 30.
So while it is good to see innovation in terms of criteria and products, the fact is affordability remains key. With house prices at the level they are, there will always be people who cannot or simply do not want to get a mortgage.