With 2006 barely a third of the way through, it seems that property prices have pulled themselves out of the doldrums of the last few years and are finally on the way up. Although this might be good news for sellers, estate agents and everybody in the mortgage industry, it is another kick in the teeth for many first-time buyers (FTBs).
Anecdotal evidence shows that some FTBs have used this period of soft property prices and higher interest rates to build up a bigger deposit and are now looking to buy. But for many would-be buyers, even with the abundance of good mortgage deals currently available, the chance of getting that first foot on the property ladder is slipping away yet again.
But there is a glimmer of hope for some first-time borrowers – those people who stand out from the traditional customer profile and for whom a few mortgage providers are willing to be more flexible with their lending criteria. A handful of lenders are now offering mortgages specifically designed for graduates, while others have created products for ‘professionals’, borrowers working in professions such as medicine, law or accountancy. These are jobs where there is an identifiable career path, qualifications and a strong likelihood of a significant increase in income as the borrower progresses in their chosen field.
Niche products
Although such mortgages are available from mainstream lenders including NatWest, it tends to be the smaller players like the Cooperative Bank, Accord Mortgages and Scottish Widows Bank that specialise in these niche products. Not only are they more flexible with their income multiples – the Cooperative Bank will lend up to 4.5 times a graduates’ income if they earn more than £20,000 a year, for example – they will often lend at a higher loan-to-value (LTV) than traditional lenders. With Scottish Widows, graduate customers can borrow up to 102 per cent LTV, whereas the lender’s professional mortgage product offers 110 per cent LTV. Accord Mortgages will loan its professional borrowers up to 115 per cent LTV.
According to Ray Boulger, senior technical manager at broker Charcol, unlike some FTB products that don’t actually offer any advantages over standard mortgages, he believes that niche products for professionals and graduates are actually filling a gap in the marketplace.
Boulger explains: “These sorts of mortgages are very definitely worthwhile. Whereas FTB products are not always the best deal available, graduate and professional mortgages are a very different ball game. They usually offer 100 per cent LTV with no higher lending charges (HLCs) and good income multiples. They give certain people the opportunity to borrow a lot more in relation to their incomes.”
With graduate and professional mortgages, lenders essentially take a longer-term view of the borrower’s ability to meet their repayment obligations based on perceived greater job security and rising incomes. For graduates, this normally means that they must have graduated no more than five years ago and have been in full-time employment for at least six months, usually earning a minimum specified salary. In the case of professionals, most lenders have a list of qualifying professions that include the likes of doctors, accountants, dentists, veterinary surgeons and solicitors.
In essence lenders are using their professional status and qualifications to build a lower risk profile of the borrower. Boulger continues: “Lenders are taking the view that this type of individual is above average on the credit scale because their income will increase as their career develops.”
Not immune
Just because a borrower is a graduate or a professional it does not mean that they can bypass the normal affordability criteria, because their qualifications and careers do not make them immune from redundancy and all the other potential woes that standard customers face. However, Accord and Scottish Widows Bank are willing to lend these kinds of borrowers more than 100 per cent LTV, as much as 115 per cent in Accord’s case. The lenders say that this additional borrowing should be used for renovations on properties or help towards expenses such as legal fees.
But is there not a danger that, because they are a graduate or work in a profession, borrowers could take up the offer of increased borrowing and end up over-stretching themselves? Boulger does not agree, saying: “There has to be an element of caveat emptor, but it very much depends on the lifestyle of the borrower. If they are comfortable spending more of their income on housing provision, then they will cut back on other expenditure.”
Murdo McHardy, senior manager product development at Scottish Widows Bank, points out that, although the lender is willing to give borrowers mortgages in excess of 100 per cent LTV, affordability is still paramount. He explains: “Each case is individually underwritten, so the lending decision is based on affordability. If we are comfortable with the affordability then the actual LTV is not as important.”
McHardy says that because Scottish Widows is a smaller lender it is an ideal position to develop specialist products for specific groups of borrowers. He says: “We find a niche that we want to enter and get an in-depth knowledge of that sector – that’s what sets us apart from other lenders. Our mortgages are underwritten on a one-to-one basis, using our knowledge and understanding of remuneration in these professions.”
McHardy cites the example of a young doctor who may be moving from job to job as he picks up experience, which means that he is also likely to change his address every few months. McHardy says that many mainstream lenders would carry out a standard credit check on such a customer, which, because of the frequent change of job and location, would probably result in a lower credit score.
“Another lender would reject that doctor because of the low credit rating,” McHardy continues, “but we would review the application individually. Other lenders have tried to replicate what we offer, and they might have a good product and a good rate, but they don’t have the in-depth knowledge of the professions or graduates to back it up.”
Scottish Widows believes there are a large number of customers, particularly amongst recent graduates, that are not being catered for by mainstream lenders. According to research the lender carried out last year, two-thirds of graduates under 30 still don’t own their own homes, with most of those stating that property prices make buying unaffordable. A fifth of graduates think it could take up to 10 years to get on the property ladder, whereas one-in-12 (over half a million graduates in total) cannot ever imagine owning their own home.
Unsurprisingly according to Scottish Widows’ research, a third of graduates believe that not needing a deposit would be of most help getting them on the property ladder, whereas 36 per cent feel that if lenders took into account their future earning potential, this would also help them get closer to buying their own home.
And if affordability is key to graduates buying their first homes, the research also reveals that one-in-two graduates already pay between £50 and £100 a week in rent. Compare that to the average £98 a week a borrower would have to pay on a £100,000 mortgage, then it seems that many graduates are already earning enough to cover any potential mortgage repayments.
Flexibility
Yet professionals face other problems. Again, although many mortgages for professionals are designed to maximise the amount of loan based on an expected growth in income, some borrowers need a product that has more flexible lending criteria.
With Accord Mortgages’ professional mortgage, the lender says it has created a product for borrowers that have mortgage requirements that need individual consideration that don’t ‘fit’ easily within standard lending criteria.
For example, Accord cites a barrister who may wish to use income from a current case load rather than that shown in now historic accounts, or a solicitor or accountant that can not obtain their partners’ agreement to provide the full partnership accounts to a lender. Accord says that in such circumstances it provides a pragmatic approach with individual underwriting for each case.
With the Scottish Widows professional mortgage there is also an offset facility if borrowers choose a variable or discounted rate. The mortgage interest is offset against their savings, which the lender says could help borrowers pay off their debts sooner, as well as bring tax advantages. This could be ideal for higher income earning professionals, but of course there are other offset mortgage products available which may be equally suitable.
According to Ray Boulger at Charcol, the Clydesdale Bank has extended it existing professional mortgage product to higher income earners that may not fall into the limited category of professions most lenders stick to. This means that workers such as senior managers or directors can also benefit from higher LTVs because, although their mortgage payments will take a larger chunk of their pay, as they are on higher salaries affordability will still be good.
Looking at the whole picture
But as with all mortgage decisions, it is important that brokers look at the whole picture before making their recommendations to customers. Although these products are designed for graduates and professionals, it does not necessarily mean that they are the only choice for those borrowers, or even the best product available to them.
James Cotton, mortgage specialist with brokers London & Country (L&C), explains: “Just because you are a graduate, it does not mean you should automatically go for a graduate mortgage. If you are qualified and experienced with a good income, you are just as likely to find something else suitable out there in the market.”
Cotton also points out that some mortgages offering 100 per cent LTV and higher will attract a higher lending charge, so graduates and professionals should check to see if these fees have been applied to any loan they are considering.
Although mortgages with LTVs in excess of 100 per cent may seem an attractive way to raise more cash to pay for renovations, decorating or even to furnish a new property, borrowers must remember that this all adds to the cost of their mortgage, even if they are fairly confident that their salaries will increase in the years ahead. They also need to remember that when they sell their property they will need to sell it for significantly more than they originally paid to cover the additional borrowing and expenses involved, as well as make a profit.
Cotton says that the development of these types of mortgages shows that lenders are willing to innovate to bring home loans to a wider range of customers. “It is a good sign that lenders are looking at ways to help borrowers get what they need and borrow more if they are able to service a higher loan,” he says.
However, Cotton reiterates that although these mortgages may seem appealing, potential borrowers should always turn to a broker first for help. “There is not necessarily an increased risk with these kinds of mortgages. Lenders are trying to strike a balance of offering more to borrowers on one hand, but on the other hand being responsible with their lending.”
He concludes: The onus is still on the borrower and the adviser to see through the name of the product and look at what it actually involves and what it offers. Most people don’t care what a mortgage is called, just so long as it does what they want it to.”
Alternatives
For graduates, students or indeed any other FTBs, there are a range of different mortgage solutions that may be suitable and even fit the bill better than graduate or professional mortgages. Guarantor mortgages are growing in popularity, where another person, usually a parent or close family member, will stand guarantee for part of the borrower’s mortgage, again enabling them to get a bigger LTV. Some lenders are actively marketing mortgages for parents and children in an attempt to bring more solutions to FTBs.
At the end of the year, the government will launch its shared equity property scheme with mortgages supplied by Nationwide Building Society, Halifax and Yorkshire Bank. If the scheme is a success, then not only will those three lenders probably expand their offerings, we could see other lenders offering shared equity products.
As the property market heats up again, the struggle for FTBs to buy their own home can only worsen. If so, we are likely to see more lenders developing specialist mortgages for niche groups of borrowers, providing intermediaries with more solutions for their clients.
