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Promising Future

With the exam season in full swing, the thoughts of most higher education students must be turning towards their financial futures.

Facing significant student debt and steeply climbing house prices, many see buying their own property as a daunting if not overwhelming prospect. But for switched on lenders and brokers, opportunity knocks.

This year 320,000 students will be graduating with at least one degree. And over the past five years a remarkable 1.1 million students have achieved at least one degree level qualification. The graduate market is already huge and the rising trend shows no sign of slowing.

With such a vast potential market its no wonder many lenders and brokers are paying special attention to graduates. There are many offers for these potential clients to explore.

A true graduate mortgage should probably be referred to as a professional mortgage. These mortgages are offered only to those people who fit a limited set of criteria and are often attached to a specific career path. For example, medical and scientific graduates are likely to fit these criteria while art students would probably not.

Such graduates offer lenders an almost guaranteed ability to repay a mortgage with minimal risk, despite offering higher income multiples and lower short-term repayment rates.

A typical example is Scottish Widows professional mortgage. This is designed for doctors, dentists, accountants, solicitors, teachers, vets and pharmacists. It allows applicants to borrow 100% of the valuation or purchase price of the property, whichever is lower. And they can borrow 10% on top of this for other purposes such as home improvements, a holiday, a car, business or education needs. This deal is available on a five-year fixed rate at 5.79% at up to 4 x income, with a maximum term of 40 years and a maximum reserve account of up to 20,000.

Despite the great offers available to professional graduates, professional mortgages are not widely advertised to the public, which is perhaps a tactic to discourage those who have not graduated from qualifying courses.

So for the time being, professional mortgages remain the domain of selected IFAs who deal directly with unions and professional bodies.

Of course, there are many other graduate mortgage deals in the market. For the most part, these are carefully rebranded first-time buyer deals. That does not mean they are of any less value either for graduates or for the lenders offering them.
For graduates who do not possess one of the qualifications required for professional mortgages, the first-time buyer options offered by lenders may be suitable to get them on the first rung of the property ladder. And helping such people buy property is something lenders and government policy makers should be pursuing aggressively, given the potential earnings of professional graduates.

The increasing flexibility of many lenders allows alternative solutions to be offered. There are more 100% or even 100%-plus mortgage deals which can be used to cover almost all the costs of purchasing homes.

For example, Northern Rock will lend up to 125% of a propertys value. It does this by having 95% secured against the house and up to 30% to a maximum of 30,000 as an unsecured loan at the same interest rate and term as the mortgage. It will also consider income multiples of up to 5.6 x single income on applicants earning over 35,000, when taking a five-year fixed rate of 6.39%.

Alternatively, Coventry offers first-time buyers a combined mortgage and secured loan with no higher lending charge. Coventry lends up to 125% and has just launched a three-year fixed rate at 5.50% with the option to overpay 5% a year and no valuation charge.

Parents purchasing power should not be ignored when considering graduates. Previously, lenders regarded gifted deposits with some apprehension, given the possibility of Inheritance Tax should the parent die, but many lenders are now much more liberal about accepting deposits from such sources. Using the parents equity or income in a joint or guarantor mortgage presents new opportunities. Savvy brokers who know their client base can capitalise here.

Having a parent as a co-borrower can be a good thing for lenders and brokers. For lenders, the extra assurances provided by having a parent jointly buy a property with their child cannot be underestimated.

While a graduate with a moderate income and student debt would probably not be an appealing prospect for a lender, that same graduate supported by their parents equity represents a significantly reduced risk.

For brokers, the ability to market directly to parents of graduates to offer this solution provides a significant advantage in a crowded marketplace.

A good example of this is Newcastles guarantor mortgage. A newly qualified accountant aged 22 and earning 15,000 a year may wish to take out a mortgage on a property worth 100,000. A traditional lender may be prepared to lend 4 x the borrowers income in this situation 60,000. With the guarantor mortgage Newcastle would allow the newly qualified accountant to apply for a loan worth 100,000 provided a close relative was prepared to act as a guarantor. This offers a fixed rate of 5.99% until September 30 2009.

These deals offer some of the best chances for young buyers to join an increasingly expensive property market. And we should not forget how important it is for fresh blood to enter the housing market graduates climb up the property ladder is vital to the sectors growth.

The governments shared ownership schemes also allow young people to buy homes that would otherwise be too expensive for them. For this reason the schemes have attracted a fair amount of attention in the press.

The governments plans are still not being fully explored because they have several drawbacks.

First, shared ownership is not as readily available as one might expect. Many local housing associations
still do not offer shared ownership schemes, leaving those who wish to go for shared ownership to do it via private companies.

Also, shared ownership agreements can be oppressively restrictive sometimes more so than youd expect when renting a property. Some housing associations even require the home owner to ask permission before they decorate their homes. And when it comes to selling a shared ownership home, there may well be more serious issues such as housing association restrictions on who the owners can sell to.

There are innumerable offers open to graduates of all kinds. And it is worth remembering that all of these are perfectly suitable for any young employed people, broadening the range of potential customers considerably.
Given the tenor of comments in the media and many people in the finance industry, simply having a degree is not an advantage when applying for a mortgage, given the debt it brings with it.

While professional mortgages are a serious attempt to tap into the graduate market, their scope is so limited that the vast majority of graduates have no hope of qualifying for them.

But there is hope for graduates and for lenders that wish to market to them. There are a great many products that can be tailored to suit graduates needs, and as more lenders become clued up on that fact that they must support first-time buyers to promote market growth these options will increase.

The first step on the ladder is the hardest, but it is likely to be the first of many steps for graduates. In helping graduates purchase their first homes we as an industry will be creating customers for future mortgages and remortgages.

If these graduates receive a high standard of service and good deals, the intermediaries who sign them up will be rewarded with loyalty and repeat business.

A broker who knows his customer base can propose effective solutions to the parents of graduates, or even market directly to students with leaflet drops and posters on university campuses.

Graduates are a rapidly growing and increasingly important customer base for brokers as are all first-time buyers. Getting them into the property market can only boost brokers earning potential in the longer term.

With just over 420,000 applicants to higher education this year alone a 20% increase over last years application figures this is a rapidly growing market that will continue to become more important to lenders and brokers. Graduates are the sort of potential customers nobody in the industry can afford to ignore.

Thomas Reeh is chief executive of blackandwhite mortgages


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