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Student Mortgages: A Risky Business?

For many students thinking about their finances at university, the cost of accommodation is a big concern. According to the figures from the National Union of Students, university letting costs rose 25% between 2010 and 2013, meaning that the average student let now costs 95% of student’s maintenance allowance. In response to this, some students and parents have decided that their best financial option is to consider buying a property for university.

shutterstock_141058033Full-time students do not have a full-time income, so does that mean they are a poor risk for lenders? Not necessarily. Responsible, organized students with an understanding of personal finance could turn their own home into a valuable asset. In fact, if the market conditions are right, students could live rent-free, earn a small annual profit and perhaps even offset tuition fees with capital gains realized when their home is eventually sold.

Mortgage lenders Bath Building Society (BBS) and Aldermore offer student mortgages of up to 100% LTV on homes in England and Wales valued between £50,000 and £300,000. In each case the mortgage is guaranteed with equity (minimum £40,000) from a parent or close relative’s home.

Guarantors should be no older than 60 when the mortgage is taken out, as they will become liable for any missing mortgage payments for up to 10 years. The property can be held solely in the name of the student, or jointly with the guarantor.

As you might expect, the cost of these ‘family guarantee’ mortgages is significantly higher than those available to first time buyers in employment. Bath Building Society offers an initial standard variable rate of 5.04%, while Aldermore offers 2- or 3-year fixed rate mortgages at 5.48% and 5.68%.

In order to cover costs the student will have to work part time to pay the mortgage, or let out one or more of their rooms to other tenants. If the second option is chosen, it is vital that the student is organized enough to find suitable tenants and collect rent, otherwise both the new property and the guarantor’s home may be put at risk.

There are also other details to consider. While Bath Building Society will lend to students aged 18 or over, Aldermore will only consider applicants over 21. Suitable students will need to have successfully completed a year of university before they become eligible, and will have to have at least 2 years left on their course.

In addition, BBS will only provide mortgages for properties with a maximum of 4 bedrooms within a 10-mile radius of the university attended. They will not provide mortgages for ex-local authority flats or flats in buildings of more than 6 storeys. Guarantors must reside in England and Wales and have a clean credit history.

One student who has made the idea work is Jonathan Pearson, an architecture and technology student from Anglia Ruskin University. Aged 20 Bath Building Society granted him a 100% mortgage on a £183,000 3-bed home in Chelmsford. He converted the sitting room into a bedroom for himself and rented the 3 bedrooms to fellow students, bringing in £1320 per month in rent.

Jonathan’s rental income comfortably covers his £775 mortgage payment and other bills. With a rising market, his home is now worth about £220,000 (a profit of around £37,000). Because the property is his principal residence, Jonathan is eligible for full capital gains tax relief.

It is important that potential guarantors assess the implications of a student mortgage carefully before they proceed. Interested parents or close relatives should consult a financial advisor to find the best mortgage deal and decide whether they are in the right financial situation to be able to cope if things went wrong. Guarantors should also be aware that this kind of mortgage could prevent them from accessing other equity-based forms of credit.

There is also the issue of up-front costs. Unless the student has significant savings, guarantors will have to cover mortgage and valuation fees, solicitors’ fees and other costs. Remember that 100% LTV mortgages will attract additional charges.

An important aspect to consider is the financial literacy and responsibility of the student concerned. Not every young person is ready to take on the responsibilities of being a homeowner and landlord. They will have to manage tenants carefully and ensure that they let rooms using an official Licence Agreement.

shutterstock_96137846The student will also have to look after the fixtures and fittings of their home, ensure that appropriate safety checks are carried out and arrange for any repairs. Guarantors should decide how much they will need to be involved with these issues, and whether in fact it would be practical for them to do this.

Timing is also an important element of success. Student lets are usually advertised in January and February for occupation the following academic year, so it is important that if you intend to let your property it is available to view in advance. Bath Building Society allows for this situation by permitting a tenant to occupy the property on a 6-month AST before the student owner and new tenants move in at the start of the academic year. Other mortgage providers may insist that the owner move in immediately, so it is important to check the small print on any mortgage agreement.

A student mortgage may provide a stable and safe home for many students, especially those studying longer courses such as medicine, architecture, dentistry, veterinary medicine, or a Ph.D. With no rent and tax-free income up to £4000 per year, it could provide a way for students to leave university in the black, rather than the red.

But student mortgages pose significant risks for those who do not prepare in advance. It is essential to know the area and the housing market. Find out about market rents for students and about the rights and responsibilities of becoming a landlord. Understand that the value of any property can go down as well as up. If it seems right after thorough research and financial advice – go for it!

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