UK

Students can get mortgage with NO DEPOSIT… if they charge their friends rent

Next month school leavers across the country will begin their time at university, becoming part of an estimated 2.5 million students enrolled at UK higher education institutions.

Many will be confronting the prospect of paying rent for the first time, not to mention the costs of bills, going out and of course, tuition fees.

You certainly wouldn’t expect to find many university freshers considering a mortgage application with all those financial liabilities to navigate.

To apply for a buy-for-uni mortgage, students will need to be over 18 as well as being a UK resident and in full-time higher education at the date of application

But a handful of lenders have put together a proposition that offers students an alternative to paying rent by allowing them to buy a home, with no deposit.

Bath, Loughborough and Vernon building societies have recognised there could be an opportunity for students to buy a home, and then charge friends or fellow students rent to cover the mortgage payments.

David Hollingworth, associate director at L&C Mortgages says: ‘Mortgages and students are not usually two things that you’d associate as a package.

‘Students are unlikely to have much if any income and therefore will always struggle to meet the primary requirement of a mortgage lender in demonstrating affordability to take on a mortgage.

‘They also aren’t likely to have a deposit to use a buy-to-let mortgage, let alone the minimum income or home ownership that many lenders would expect.

‘These issues have seen some lenders offering students a chance to buy a property rather than rent – but with the help of their parents.’

How does it work?

A student mortgage, commonly known as a ‘buy-for-uni’ mortgage, allows a student to buy with the help of a family member, who acts as a guarantor.

This means it is possible for students to buy a property with a mortgage covering 100 per cent of the purchase price.

Spare rooms in the house can then be rented out to friends or lodgers and the income received can be used to help cover the mortgage payments.

Chris Sykes, associate director and mortgage consultant at Private Finance says: ‘The mortgage amount is based on the rental income the property could yield from letting out of the spare rooms.

‘The guarantor will be on the mortgage deeds but not on the property deeds, and their income can be used to help the application.

‘If no deposit is available then the guarantor can either put money on account with the lender to the value of 20 per cent of the mortgage, or they can use their own home as security for the loan.’

What are the benefits?

Getting on the property ladder so early is one attraction, but the chance to avoid paying rent each month throughout university will be another major draw.

Questions to ask before applying for a Buy for Uni mortgage

By mortgage consultant Chris Sykes  

1) Will you stay in the property after university?

2) What’s your plan to pay the mortgage down to a much lower level so you can refinance – either as a residential property or a buy to let when you leave?

3) If you plan to sell when you leave – will you have sufficient funds to cover any shortfall were property prices to fall?

4) Will you actually stay in the location after university?

5) You will lose first time buyer stamp duty benefits when buying this, so would it have been better to save that for a future residential purchase? 

For students across the UK, rent remains the biggest monthly spend, according to Natwest’s 2021 Student Living Index.

Average student rents have increased by 18.5 per cent since last year and are now £518.10 per month according to the bank’s analysis.

‘This could offer a cost-effective way to cover accommodation costs at university, and would be particularly effective for someone embarking on a longer course and wanting to get on the property ladder,’ says Hollingworth.

There are also tax advantages to consider.

As a first-time buyer, students won’t be required to pay stamp duty for purchases under £500,000 – or £300,000 from September when the stamp duty holiday ends). 

When they come to sell, if the property has remained their principal residence, they won’t be liable for capital gains tax either.

Hollingworth adds: ‘Although a parent may be joint on the mortgage, the property can generally be owned in the student’s name only.’

‘This allows them to avoid the payment of the stamp duty surcharge and any potential capital gains tax liability for the parent.’

What’s the catch?

Unsurprisingly there are a few obstacles to get around before you will be accepted for a mortgage covering 100 per cent of the purchase price.

Students must have at least one year left at university to apply, and they must have a parent or guardian willing to be on the mortgage agreement as a guarantor.

In some cases, it is possible for other family members such as grandparents to help, but lenders will consider this on a case-by-case basis.

If a parent decides to guarantee the mortgage, they may need to be willing to offer up the family home or another property as collateral, in case their son or daughter finds themselves unable to either keep up with the monthly payments or ultimately repay the mortgage.

Living costs: Average student rents have increased by 18.5 per cent since 2020 and are now £518.10 per month, according to Natwest’s analysis

Living costs: Average student rents have increased by 18.5 per cent since 2020 and are now £518.10 per month, according to Natwest’s analysis

Tanasè Rivers, head of marketing, brand and culture at Vernon Building Society says: ‘It requires you to have a parent who acts as a joint borrower, although the property is owned solely by the student.’

‘This means each borrower is liable for the full amount of the debt and the mortgage payments, not just a share of it.’

‘Parents are therefore liable for the full mortgage amount, the repayments and associated risks, including any security (funds or property) the parent has provided, if the student doesn’t pay the mortgage.’

Lending is capped at between £300,000 and £400,000, whilst the minimum borrowing is between £50,000 and £125,000 depending on the lender.

The location of the property and the number of bedrooms is also important.

The property must typically be within 10 miles of the university campus, and lenders appear to be keener on houses than flats.

There also needs to be between two and four bedrooms in the property that can be let to lodgers.

This means that in addition to the student owner, the maximum number of tenants is three. 

None of the building societies are willing to lend if the use of the property requires a mandatory house in multiple occupation (HMO) license.

A mandatory HMO licence is required for any property that is occupied by five or more people living together, as two or more separate households.

What deals are available?

Students that are eligible can choose between an interest only and a repayment mortgage.

With an interest-only mortgage, they will only pay the interest each month, with the loan amount remaining the same. 

Borrowers taking out an interest-only mortgage must have a plan to pay it back before the end of the term, for example by selling the property. 

With a repayment mortgage they will pay back a part of the loan, as well as the interest, each month until they eventually pay off the mortgage. 

The maximum number of bedrooms any lender will permit is four

The maximum number of bedrooms any lender will permit is four

One of the biggest differences between a buy-for-uni mortgage and a traditional mortgage is that borrowers won’t be eligible for a fixed-rate deal. 

The rates on offer are all discount mortgages. This means the initial rate is discounted by a certain rate from the lender’s ‘default’ standard variable rate for a fixed period.

The rate could change during the term of the mortgage deal, and once the initial discounted period is over they will move on to the lender’s standard variable rate (SVR).

It is possible to extend the discounted rate in some circumstances, although this will depend on the lender’s terms and how long the student has left on their course.  

Bath Building Society currently offers a variable deal at a discounted rate of 4.2 per cent for mortgages covering 100 per cent of a property’s value over either an initial two, three, four or five-year period.

There is also an product fee amounting to 0.4 per cent of the mortgage amount, which must be at least £599, and an administration and completion fee amounting to £200 in total.

Initial interest rates on Buy for Uni mortgages
Lender Rate with no deposit Rate with 20% deposit  SVR % 
Bath Building Society 4.2% 3.95% 4.9% 
Loughborough Building Society 4.25%  3.99%  5.34% 
Vernon Building Society  4.7%  Not available 5.2% 

This means that for a student purchasing a £250,000 property using a 100 per cent mortgage and paying interest only, they could expect to pay £875 per month, with £1,200 in additional fees.

For someone on a repayment deal working towards repaying the mortgage within a 25-year timeframe, the monthly repayments would increase to £1,347.

Alternatively Loughborough Building Society charges an initial 4.25 per cent interest on 100 per cent mortgages with a £499 fee for between a two-to-seven-year period. 

It also states that the variable interest rate charged will not fall below 2 per cent.

What happens when students leave university?

The buy-for-uni mortgage is designed specifically to enable a student to take ownership of a property while studying.

When their course comes to an end they may continue living in the property and start a career.

In this scenario they could convert the mortgage to a standard residential mortgage – though the student would have to have enough income and a big enough deposit to qualify.

Alternatively, it’s possible to live elsewhere but keep the property as a buy-to-let investment, converting the mortgage into a buy to let deal.

In both cases, a student will need to have built up sufficient equity within the property to switch mortgage.

For a residential mortgage they will need at least 5 per cent equity whilst for a buy-to-let mortgage the absolute minimum is 20 per cent.

It may be that they decide to simply sell the property, which means they can benefit from any capital gains if the property has risen in value.

However, if the price has fallen during their time as a student, they may find themselves in negative equity and compelled to repay any shortfall to the lender.

Rivers says: ‘You should think carefully about your plans for when you finish your studies, as the next step depends upon your own circumstances.

‘If the mortgage repayments are on an interest-only basis then the outstanding loan amount will not reduce over time.

‘If you retain the property after university then you will need a plan for repaying this amount.’ 

Are there any other downsides?  

The advantages of a buy-for-uni mortgage are clear enough, but there are potential downsides that can be difficult to foresee. 

For example, the student will surrender the stamp duty relief they gain being a first time buyer on any future property purchases. 

Anyone taking out a student mortgage will need to be comfortable with being a live in landlord and collecting rent from friends or fellow students

Anyone taking out a student mortgage will need to be comfortable with being a live in landlord and collecting rent from friends or fellow students

Even if they sold their home and started renting after they finished their course, they would be classed as a home mover and subject to the normal rates. 

This means that were they to buy their next property for £300,000 they would be liable to pay £5,000, for example. 

They would also forego the right to take advantage of the help to buy equity loan or lifetime isa account when purchasing their first home.

The costs involved with purchasing a home should also not be overlooked, especially when buying and selling a property over a short period of time – although parents may be willing to cover these. 

When buying a property you need to pay legal and survey fees as well as furnishing it when you move in. 

Then there is the upkeep and, when you come to sell, the agent fees, removal fees and another round of legal costs.

Hollingworth says: ‘Buying and selling property comes with a cost, so the shorter the likely timeframe of keeping the property the greater those costs may weigh on the benefits. 

‘It’s important to think about the longer-term goal as well as the shorter-term savings.

‘It may be that there’s a desire to stay in the area for longer for work for example, and this could help make that a reality sooner – as well as saving on rental for the student and parent alike.’

Parents also need to be sure they are comfortable with the arrangement.

‘Parents will need to understand the implications of course, and being a joint borrower brings with it a liability for the payments,’ says Hollingworth.

‘It’s therefore important to understand those issues before putting up cash or equity as security for the mortgage.’

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