Can I Get a Student Mortgage?
If you are at university and would prefer not to rent, a student mortgage could be an option. However, the criteria for this type of deal is quite strict and you will need to prove you have the income to cover the monthly repayments. Read on to find out more.
Paying money to a landlord month in, month out, often feels like pouring money down the drain, especially if the place you’re renting is a dump, so it’s not surprising that many students (not to mention their parents) would rather buy their own home.
In addition to providing you with a stable home of your own, buying a property while studying is a great way of taking your first step on the housing ladder. Renting rooms out to friends or fellow students may also provide help towards mortgage costs, as well as useful extra income.
Can students get a mortgage?
Before offering a mortgage, lenders will want to know that you can comfortably afford monthly repayments. For students without a reliable or substantial income from employment that can prove tricky, and lenders will reject an application on this basis alone.
However, some lenders will accept applications from students. Rather than basing their decision on your finances alone, they most likely will request that you provide a guarantor who can step in to make the mortgage repayments if you can’t.
In the case of student mortgages, lenders are likely to request that guarantors are either your parents or another close family member and that they own their own home. There may also be a maximum age for guarantors – typically between 75 and 80 when the mortgage term ends.
Although first-time buyers can get on the property ladder with a 5% or 10% deposit, student borrowers are likely to need more – often around 15% mark – to reflect the additional risk they pose.
There are a limited number of 100% student mortgages, which mean you don’t need to put down a deposit at all. Often referred to as buy-for-uni mortgages, the downside is that interest rates are likely to be higher than deals that require a deposit. Parents will also need to make a greater financial commitment to support the purchase – for example, by putting their home up as security and by investing a lump sum (acting as your deposit) in a linked savings account.
If you have enough money to put up a decent deposit – either with parental or grandparents’ support through a gifted deposit or through an inheritance from a grandparent – a conventional student mortgage may be the cheapest option.
Although parents’ names may be on either type of student mortgage, they won’t be on the title deeds of the property. This is beneficial for them as it spares them the 3% stamp duty charged to people investing in second homes.
How do student mortgages work?
Once you have jumped through the hurdles to prove that you (or your family) can afford the mortgage, a student mortgage works in the same way as any other.
Repayments are made monthly over the term of your mortgage or until you come to sell. However, if you cannot afford to make repayments the lender will turn to your guarantor or other named borrower on your mortgage.
Which lenders offer student mortgages?
Mortgages for students are available from a number of the larger high street banks and building societies. The more niche 100% loan-to-value (LTV) student mortgages are limited to a couple of smaller building societies.
What types of properties can you buy with a student mortgage?
You won’t be confined to new builds, like with some homeownership schemes, or have to buy designated ‘student accommodation’. However, the lender may stipulate what and where you can buy.
For example, the property may need to be within a 10-mile radius of a university and have three to four bedrooms to ensure there is space for rent-paying house mates. Ex-local authority properties may be off the cards too.
What happens after graduation?
At the end of their course students have three choices: they may decide to sell the property; carry on living there and renting out rooms to help pay the mortgage; or move out but keep renting it.
Before making any decisions, it is important to check your lender’s policy. If you intend to stay living in the property, it may need to be remortgaged on to a standard mortgage, while if you decide to move out but keep the property as a rental you will likely need to convert it to a buy-to-let mortgage.
Student versus buy-to-let mortgages
Purchasing a property to rent to students is a popular investment, and most landlords would typically use a buy-to-let mortgage to finance the purchase. However, matters are complicated if parent investors plan to let the property out to their child, or any other family member.
If less than 40% of the property is to be occupied by family, then you may be able to get a standard buy-to-let mortgage. But if that’s not the case, a so-called family buy-to-let mortgage is required.
Parents using a buy-to-let mortgage will also have to pay the 3% stamp duty surcharge because they are purchasing a second property. Student mortgages avoid this because the parents' names won’t be on the title deeds.
Buy-to-let mortgage interest rates may be lower, however, reducing monthly mortgage repayments.
» COMPARE: Buy-to-let deals
What to consider before applying?
Buying a student property may seem like an effective use of the family’s cash but it is not without its hassles.
The student, or their parents, will become a landlord with all the responsibilities that entails – from finding tenants to collecting rent, sorting the inventory and maintaining the property. This could be stressful to say the least for a teenager renting to friends, particularly if there are problems with rent payments, or damage to the property.
It is also important to note that with more purpose-built student accommodation being built with modern facilities, the market is becoming more competitive and students’ expectations are rising. That means you may have to do more than give the walls a quick lick of paint to get the accommodation up to scratch and to a lettable standard.
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Rachel Lacey is freelance journalist with 20 years experience. She specialises in personal finance and retirement planning and is passionate about simplifying money matters for all. Read more