Entering the property maze

Paul Gibson graduated from Leeds Metropolitan University last year and he now works as a recruitment consultant for Finance Professionals in London. Paul bought his first flat in Docklands for £180,000 last June. He has a 25-year variable rate mortgage with HSBC - but says he plans to 'fix it' in a couple of years for five years. Why did he buy?

"I was renting a flat in the same block as I am in now for £1,200 a month. I worked out that if I was to buy a flat it would save me nearly half that. It was stupid not to get a mortgage especially as I was paying off my student debt. "It was a bit scary buying at first. But I thought, if I don't buy now I'll only want to buy next year when it will be even more expensive. I see my flat as an investment for the future - it is well worth doing."

Where did he get the money from to buy? "I had some money in an investment left to me when a relative died. So, I used that as my deposit." How did he go about buying? "I used a financial adviser who was a personal contact. He looked through some deals for me and worked out that HSBC was the best offer for me. "HSBC gave me a planning manager, who told me what it would cost and how long I would be paying it for." What happens if he's out of work? "I have a mortgage payment protection scheme, so if I fall ill or lose my job will would pay my mortgage for me."



Graduate life is now synonymous with debt. Barclays Bank estimates that, on average, a graduate owes £5,961, while the National Union of Students estimates the true figure to be somewhere between £10,000 and £15,000.

No chance, then, that recent graduates can put a foot on the property ladder? Wrong. According to HSBC bank, one in five graduates is able to buy his or her first home within a year of graduating, and says the bank, deposits of 10% or more are common. Two-thirds finance their deposit from savings and a quarter are given money by parents.

This comes as no shock to Ray Boulger of mortgage adviser Charcol. "We are seeing a significant number of new graduates looking to buy properties so it doesn't suprise me that 19% of graduates are buying properties. They can borrow higher income multiples and banks and building societies are now giving good deals without mortgage indemnity guarantees (MIGs). In some cases graduates get better deals than others."

David Hollingworth, of mortgage adviser London and Country, says: "Graduates who go into well paid positions have borrowing powers straight away. Those that go into trainee professional positions (doctors, dentists, lawyers etc) will be able to stretch their income multiples based on their expected salary in, say, two years."

But graduates thinking of getting on to the property ladder should be aware of several things. For starters, lenders look for evidence of income. Most lend between three-and-a-quarter times your salary but some will lend up to four-times your salary. If you plan to buy a house with a partner you can borrow 2.5 to 2.75 times your joint salary. Lenders such as C&G, HSBC, Nat West, Scottish Widows, Northern Rock and Birmingham Midshires may go further.

Jane Harrison, of London and Country, says buying with friends is a great idea and becoming more common. "But," she adds, "get a solicitor. And be clear about what what happens if one person pulls out."

Debt - such as loans, credit cards and overdrafts - will be taken into account by the lender. "This will bring your borrowing capacity down," says David Hollingworth. "Think seriously about your monthly commitments - if you do everything at once you might find you are overstretched."

To buy a property, most lenders will ask for a deposit (usually somewhere between 5% and 10% of the property's value). The larger the deposit, the more favourable position you will be in. "If you have more than 10% deposit you'll be attractive to more lenders with more favourable rates," he says. Why? Because if you borrow between 95% and 100% of the property value, the risk to the lender will increase. The lender will charge you for this risk by increasing interest rates.

Watch out for mortgage indemnity guarantees (MIGs) too. MIGs are insurance policies which protect lenders should they have to repossess your property. But borrowers have to pay for this expensive cover which can add as much as £1,500 to your mortgage. If you are considering two deals - one where there is an MIG and a low interest rate and another where there is no MIG but a higher interest rate - the latter will probably be cheaper.

With economists predicting a rate increase next year it is probably best to consider a fixed or capped rate mortgage. However check the small print as many 'cashback', fixed rate or capped rate loans will have so-called redemption penalties: if you change your mortgage during a set period, the lender may charge you as much as six months of interest. And be aware of the extra costs a mortgage entails like arrangement fees, valuation fees, legal fees and stamp duty (1% for anything over £60,000). And that's before you start shelling out for removals and furnishings.