Reasons for Graduate Mortgages
At current UK property price levels, getting on to the first rung of the property ladder is difficult for many first time buyers, not just graduates. Finding enough money for a deposit on a property is not a simple task for many potential homeowners.
Mortgage providers are well aware that if the first time buyer market slows down, then eventually the whole property market will be affected, so innovative lenders are always looking to introduce different types of mortgage to ensure that the property market does not grind to a halt. The graduate mortgage is one avenue being followed by some (but not all) lenders.
Why Offer Graduate Mortgages
Traditionally, graduates have been identified as a group likely to become high earners and, therefore, they are seen as desirable potential mortgage customers for financial institutions. By targeting graduates at the start of their careers, mortgage providers hope to build profitable relationships with them over the long-term.
This strategy is probably sound when considering the salaries of graduates from well respected universities, with degrees in recognised academic subjects (e.g. medicine, law, finance, engineering, etc.).
However, following the expansion of the UK higher education sector that has taken place since the 1990s, the number of graduate jobs has not increased at the same rate as the number of graduates coming on to the jobs' market. Graduates from lower division universities often find it impossible to land high calibre jobs with the qualifications they have obtained, especially if their chosen subject of study is not considered by employers to be relevant or sufficiently rigorous academically.
This perception of the graduate jobs' market probably explains why some mortgage lenders, such as Northern Rock, have not ventured into the graduate mortgage market. Instead, they have chosen to promote different mortgage products to graduates and other first time buyers.
It is worth bearing in mind that graduates will still have to prove certain factors before they are able to obtain a graduate mortgage. For example, there will be a requirement to prove that the repayments can be met from the borrower's current salary. Although there will be some allowance for future increases, it is still important that the current payments can be met.
One alternative that some lenders are beginning to use as a way of assuring that mortgage payments can be met is the rent to buy mortgage. This works by using the rental payments that have been made for the last 12 months as a guide to how cash is being managed and what sort of payments can be made without causing additional hardship.
Lenders will often offer graduate mortgages as a way of attracting future high earners;
recently, lenders have become aware of the increasing number of graduates who do not go on to make large earnings and are, therefore, becoming stricter with their lending criteria;
some lenders are not offering graduate mortgages but are offering a range of first time buyer mortgages and rent to buy mortgages where previous rental liability is taken into consideration.