After leaving higher education, a whole new world of prospects and possibilities opens up for you. But much like landing yourself your first proper job, getting a mortgage can be no mean feat for recently graduated borrowers.
While you may be equipped with a fresh new qualification under your belt and letters after your name, you’re also likely to carry the burden of hefty student loans, entry-level income and lack of savings - all of which can be problematic in the mortgage world.
Fortunately, there are lenders available who are understanding of these circumstances. This guide explains what to look out for, the benefits of graduate mortgages, and how to secure one with flexible terms and competitive rates.
Why is it harder to get a mortgage after graduating?
While the market has gained some momentum after the cutbacks in 2020, mortgage providers are still erring on the side of caution before authorising loans.
To provide themselves with as much assurance as possible, many lenders have tightened their purse strings and ramped up their eligibility criteria, usually reserving the most competitive rates for those with good affordability, high deposits and flawless credit reports.
This can present a few problems to those who have dedicated their lives to their studies for the past few years. As a graduate, or soon-to-be graduate, the chances are that one or more of the following applying:
You have low or no deposit.
You’ve racked up significant student loans and overdrafts.
Your credit file isn’t looking its best.
You have entry-level income or are yet to start a new job.
The good news is that help is available - the trick is knowing where to find it. While it’s rare to come across products designed exclusively for graduates, there are plenty of lenders with more flexible lending criteria for such borrowers.
What are the benefits of graduate mortgages?
As well as being sympathetic towards borrowers who may not meet the typical lending criteria, there can be other incentives for choosing a graduate mortgage provider. You may also benefit from:
Competitive rates and low fees.
Low deposit requirements - sometimes as low as 95% loan-to-value (LTV).
Increased borrowing in relation to income.
More leniency surrounding employment status.
Special rates for professional graduates.
And these incentives aren’t just aimed at those fresh out of university; some lenders have no graduation expiry date, meaning you may still be able to enjoy the perks of a graduate mortgage even if you left higher education several years ago.
Mortgage guarantee before graduating
If you’re yet to start your new job after graduating, mainstream lenders may reject a mortgage application until you’ve got a few months’ payslips as proof of earnings.
Graduate mortgage providers on the other hand are often happy to accept a formal contract from your new employer as a form of income guarantee - provided the document is signed by both parties and details your salary and start date.
If you’re planning to be self-employed after graduating, either as a stop-gap or a long-term career plan, this shouldn’t be a problem provided you meet the affordability requirements - although most providers require at least 12 months’ trading history showing sufficient, stable income.
Mortgages for professional graduates
Graduates working in certain fields, such as law, medicine, or similarly skilled professions, can find it easier to secure a mortgage. There may also be more lenient earning history requirements for self-employed applicants.
Being qualified in a professional or highly specialist role usually means your chances of securing employment are high, and, given the time you’ve dedicated to qualifying, can suggest to lenders that you’ll stay in this profession for some time.
As such, lenders often deem professional graduates as lower-risk applicants, and may offer you preferential rates or make certain allowances if your application comes up short in other areas. You may also be eligible for exclusive mortgage products for professionals.
Family mortgage options for graduates
If you’ve recently graduated and are looking to buy, you might look to your parents for financial support - and you’re not alone. New borrowers are increasingly reliant on the bank of mum and dad (BoMaD), and there are a range of family mortgage products available.
Joint mortgage with parents
A joint mortgage with parents is when you borrow money for a home with either one or both of your parents. All applicants need to meet the lender’s eligibility criteria, and are equally liable for the repayments.
If you’re struggling to save a sufficient deposit for a mortgage, a gifted deposit from a parent or other family member can provide a good leg-up onto the ladder. There must be no obligation for you to repay a gifted deposit, and giftees may need to sign a waiver confirming this.
A guarantor has no legal claim to the property, but is liable if you miss a repayment. Guarantors will usually use their home as collateral for the loan, so there is a risk of repossession if for whatever reason both parties are unable to pay the mortgage.
Family offset mortgages
A family offset mortgage allows parents to offset the value of their savings against your mortgage, reducing the amount of interest you pay. The funds are locked away until you’ve repaid around 25-30% of the capital and can take on the loan yourself.
Mortgage schemes for graduates
While not exclusively aimed at graduates, there are a number of government schemes available to help first-time buyers onto the ladder. Since they are typically designed for those with entry-level income or low deposits, they may be perfectly suited to your needs.
Help to Buy: Equity Loan for graduates
The Help to Buy: Equity Loan scheme presents plenty of opportunities for recent graduates. Eligible first-time buyers can borrow a maximum of 20% (40% in London) of the purchase price of a new-build home, as long as the price tag doesn’t exceed £600,000.
You’ll only need to save a 5% deposit (although you can contribute more if you wish), and the government will loan you up to an additional 20%, meaning you’ll only need a 75% LTV mortgage. The loan is interest-free for the first five years.
Shared ownership mortgages for graduates
If you can’t afford the repayments on a mortgage for 100% of a property, shared ownership allows you to buy a share of a property (usually 25 - 75%), and pay reduced rent on the remaining part. Over time, you can purchase additional shares, up to 100%, of the property.
Shared ownership mortgages can be a great option for those just starting out in their career, as income and affordability requirements tend to be lower, and it gives you the opportunity to increase your share of ownership in alignment with your finances.
First Homes for graduates
The First Homes programme is designed specifically for first-time buyers and key workers struggling to get a conventional mortgage in their local area. Specialist-built flats and houses are available at a discount of at least 30% compared to the market value.
The great thing about the government schemes is that they can usually be used in conjunction with lender-specific mortgage deals, so any special rates or incentives you’ve been offered should still apply. Find out more in our first-time buyer mortgage guide.
Am I eligible for a graduate mortgage?
Regardless of who you are and what type of mortgage you’re after, borrowers will still need to meet the lending criteria. While graduate mortgage lenders may be more flexible, there are still minimum eligibility requirements.
How much can I borrow with a graduate mortgage?
Every mortgage provider will work to different lending criteria, but how much you can borrow is usually dictated by your earnings (based on income multiples) and the outcome of your affordability assessment.
Most lenders cap lending at 3.5 - 4.5x your annual income, but some may be more or less generous, depending on your circumstances. For example, if you’ve got a clean credit file and low outgoings, you may be able to borrow more.
Using the 3.5 - 4.5x income multiple allowance as an example, a graduate earning a salary of £25,000 a year may be eligible for a mortgage of between £87,500 and £112,500 respectively.
From here, mortgage providers will calculate your affordability through an assessment of your income in relation to your outgoings. If your affordability is good (low outgoings) you may be able to borrow more, but if it’s poor (high outgoings) lenders may limit borrowing or reject your application.
Deposit requirements for graduates
There are a number of lenders who are willing to offer graduate mortgages with as little as 5% deposit, and even less if a family member is giving you financial support.
But it’s always advisable to put down as much deposit as you can, as it can give you access to more lenders and better rates. This is why government schemes like the Help to Buy Equity Loan work in the way they do: by adding to your deposit to unlock more favourable deals.
If you’re deemed a high-risk applicant (e.g. poor credit or low affordability) lenders may require a higher deposit to mitigate the risk.
Credit files and graduate mortgages
As well as income and affordability checks, lenders will carry out a credit search. They will be able to view outstanding debt, such as credit cards, phone contracts and car finance, and any historic instances of adverse credit.
Having a poor credit score or bad credit history can be a warning flag to lenders, some of which may reject your application. Others may consider you, but charge higher interest rates or add stipulations to the agreement as a result. In more severe cases, you may have to look into specialist bad credit mortgage products.
As a graduate, you may face additional challenges if you don’t have any form of credit other than a student loan. In the mortgage world, lack of credit history is almost (but not quite) as bad as having a poor credit score.
This is because it makes it difficult for lenders to assess your financial conduct, and therefore application as a whole, which could result in a rejection. If a lack of credit history is a concern for you, there are a few tips to getting on the property ladder.
How do student loans affect credit scores?
Most students rack up a lot of debt throughout higher education, but the good news is that student loans don’t appear on your credit file, nor do they impact your score in the same way other forms of debt would.
But since it’s outstanding debt, student loans will have an impact on your affordability. And once you've graduated and secured a job, you’re tasked with repaying it. Find out more in our guide to student loans and mortgage applications.
Find a graduate mortgage provider with the help of a broker
There are plenty of mortgage options available if you’re fresh out of higher education, but locating a suitable lender is crucial. This could be the difference between a rejection, and saving thousands of pounds over the course of your loan.
Our team of specialists have plenty of experience securing competitive mortgage deals for graduates, and know exactly which lenders are best suited to approach. We’re also here to offer advice, or to lend a hand with the paperwork.
Save time, money, and wasted rejections with the help of The Mortgage Hut: give us a call on 02380 980304, or submit an enquiry using our online contact form and a member of the team will be in touch.