What is a Buy-for-university mortgage ?
Many parents pay their children’s rent through university mortgage, some even go a step further and buy a property for their child to live in – ideally making a little profit from other student tenants at the same time.
But, what if your child bought themselves a student property instead?
A niche mortgage offered by two lenders is known as the buy-for-university mortgage. It allows university students to borrow up to 100% of the value of a property that they can then buy, live in and let out other rooms to fellow students.
In order to get the university mortgage, the student’s parents must provide security in the form of either cash or equity in a property such as the family home.
The mortgage terms run for three to five years on an interest-only basis before converting into a traditional mortgage – without the parental security – once the child graduates.
What are the pros and cons of university mortgage ?
Helping your child buy a house while they are at university comes with some big financial gains, but only do it if it isn’t going to leave your own savings stretched.
- Get on the property ladder and avoid paying thousands in rent during your course.
- Rent out rooms and you should make enough money to cover your University mortgage repayments and potentially your bills too.
- Avoid Stamp Duty. If your child buys their first property rather than you buying a property for them, you should avoid all Stamp Duty as they benefit from first-time buyer relief. In contrast, you would pay standard stamp duty plus the additional rate if you already own your own home. On a £300,000 property that is a £14,000 saving.
- Other costs. Even a 100% mortgage doesn’t cover all the costs involved in buying a property. You’ll still need to be able to cover conveyancing bills, surveys, insurance etc.
- Market exposure. With a 100% interest-only mortgage you risk getting in a hole if house prices fall. Even a small drop could mean you would end up in negative equity.
- Interest rates. The rates offered on Buy-for-University mortgages are higher than on traditional home loans.
- Risk. If anything goes wrong the property could be repossessed and sold by the lender. Any shortfall between the mortgage debt and what the property is sold for would be claimed from the capital parents have put up. So, you are risking your cash or equity when you sign up.
Who offers Buy-for-Uni Mortgages?
Loughborough Building Society launched a buy-for-uni mortgage last year, while Bath Building Society has been offering one for 10 years.
Loughborough BS’s product allows university students to borrow up to 100% of the value of a property with a maximum loan of £300,000. You can opt for a three- or five-year term with a 4.99% discounted variable rate and a £999 set-up fee.
Bath BS’s buy-for-uni mortgage will lend up to 100%LTV with a maximum loan of £300,000. Rates start from 5.1% for a five-year discounted variable deal with fees of at least £899.
Who can get one?
Both lenders stipulate that these mortgages are only available to students aged 18 or over in higher education in England and Wales with at least two years remaining on their course.
What do parents need to do?
If your child wants to borrow more than 80% of the value of the property then both lenders require additional security from parents, step-parents or grandparents.
This can be done in two ways:
- Cash – Loughborough BS allows a family member to deposit savings into its Assisted Purchase Deposit Guarantee Account. You retain ownership of the money, but it is collateral on the loan and earns no interest while it is in the account. You cannot make any withdrawals from this account during the mortgage term. The amount deposited must cover the difference between the amount being borrowed and 80% of the value of the property. So, if your child is borrowing £200,000 to buy a £200,000 property then you would need to put £40,000 (representing a 20% deposit) into the savings account.
- Equity – Bath Building Society requires a family member to put up their own home as collateral on the loan. Loughborough Building Society offers this as an option instead of, or as well as, cash. This is done by you agreeing to give the lender a ‘legal charge’ over the required amount of equity in your home. This would mean the lender would have a claim on your home if your child defaulted on their Buy-for-Uni mortgage.
On top of this Loughborough BS requires parents to guarantee to make up any shortfall between rental income and mortgage repayments from their own income.
How much can I borrow?
Both building societies will lend up to £300,000 with a maximum loan-to-ratio of 100%, as long as a family member provides additional security.
However, you may not actually be able to borrow that much. The final amount will depend on how much rental income the lender thinks you’ll be able to make on the property, and how much your parents earn.
What property can I buy?
You have to buy a property located within 10 miles of your university and it cannot have more than four bedrooms if you are borrowing from Loughborough BS, or three bedrooms for Bath BS.
Both lenders also have restrictions on the type of property you can buy. Neither will lend on an ex Local Authority flat. Loughborough BS rejects flats in London and studio apartments. Bath BS won’t lend on flats in blocks of more than six storeys.
Who can I let rooms to?
Neither mortgage stipulates that you have to let rooms to other students only. You are also allowed to let out the property on a short-term contract of at least six months if you buy the property before the academic year begins.
However, the student must move in at the start of the next academic year.
Both Buy-for-Uni mortgages end when you finish your studies. At that point you can either sell the property or you’ll have to remortgage onto a traditional deal.