With the housing market already short of first time buyers, Genworth Financial, warns that increased student debt will lead to a drop in the number of young people able to enter the housing market over the coming years.
As the Government pushes towards its target of encouraging 50 per cent of young people to enter higher education by 2010i, the situation is set to worsen for lenders, as half of all first time buyers, the graduates, will have increasing levels of debt.
Genworth Financial’s study reveals that a student in the South East will need to work for five years from graduation to save enough money for the minimum five per cent deposit required to buy a homeii, assuming they start to save on leaving university, which most do not.
Based on cautious debt estimates from The Student Income and Expenditure Survey (SIES)iii, the figures suggest that students starting studies in 2005 will graduate with an average debt of £15,000. Anecdotal evidence from major high street banks put this figure closer to £20,000, with debts predicted to rise to £43,825 by 2023iv.
Steven Rance, Genworth Financial Mortgage Insurance said: “The results of these calculations should sound an alarm bell for lenders who need to be aware that student debt threatens to severely disrupt the first time buyer market over the long-term.”
Rance continues: “In order to help keep the market moving, lenders should pre-empt future issues by looking to increase the number and range of High Loan To Value (HLTV) mortgage products available. The industry typically views HLTV mortgages as those with deposits of less than 20 per cent. By providing specialist graduate packages, requiring smaller or no deposits, graduates will be able to get onto the housing ladder sooner and gain a head start to future financial security.”
Current figures from the Council of Mortgage lendersv, put the current average First Time Buyer deposit at 13 per cent of the property value. An increase in HLTV mortgage product availability would help reduce the size of the deposit needed, making first time purchases more affordable to graduates.
The High LTV mortgage allows first time buyers to put down a small or even no deposit on their first purchase. Whilst traditionally a lack of deposit hasbeen viewed by the mortgage industry as presenting too high a risk of default, the use of an intermediary such as Genworth Financial, which assumes the risk of borrowers with low deposits, allows the lender to offer realistically affordable mortgage products.
Geographical distribution and starting salaries also directly affect how soon a graduate can expect to save for a deposit. In particular, Genworth’s calculations show the further south a graduate lives, the longer they will need to work for, to acquire a five percent deposit. In the South East the figure is nearly five years, whereas if a graduate were to work and live in the Midlands, they would need just two years to save a deposit, and only 18 months if they were buying in the North.
Rance concludes: “More creative ways of lending are needed to cater for the gulf between salaries and house prices. However, lenders must effectively manage the additional risk to ensure long-term stability in the market.”
