Fancy literally lording it over your college flatmates? A growing number of building societies are offering deals that let young adults buy their university home and pay the monthly mortgage with the rent they charge other students.
This week the Vernon building society in Stockport, Greater Manchester, launched a range of “buy for uni” mortgages, the third lender to do so. The other two are the Bath and Loughborough building societies, though the property can be purchased at any university town in England and Wales.
The striking feature of these deals is that students can borrow 100% of the property value – so there is no need to save up tens of thousands of pounds for a deposit. What’s more, the student almost certainly won’t have to pay any tax on the rental income, unlike a traditional landlord, nor the higher stamp duty that landlords have to pay when purchasing a second home.
Bath building society says it knows of one student who used the scheme and walked off in her early 20s with a profit of about £120,000 four years later. She then bought an apartment in Manchester and lives entirely mortgage-free.
I could see coming out of halls in my second year would mean paying loads of rent and seeing the money go down the drain
Charles Hepworth was 19 and studying engineering at Loughborough when he bought a £130,000 three-bed house in the town with a loan from Loughborough building society. He chose a very short repayment period as he wanted to pay off the mortgage as soon as possible. And apart from taking rent from two flatmates, he worked 20 hours a week to earn more cash to keep paying the sum down. Now a graduate but still living in Loughborough, Hepworth reckons the property is worth about £145,000, and he has also managed to cut the amount of mortgage outstanding.
“I decided to do it in my first year. I could see that coming out of halls in my second year would mean paying loads of rent and seeing the money just go down the drain. So I started looking into alternatives,” he says.
“I lived with friends, and it was just like any other student rental. We managed to ignore the fact that I was the landlord. Actually, my friends thought it was better, as if there was anything that needed doing, I sorted it out straight away.”
Does all this sound too good to be true? For most people it is, because there is a rather large catch: the loans will only be handed to students with relatively well-off parents.
In conventional buy-to-let deals, the borrower normally has to put down a 25% deposit. The “buy for uni” deals get around this by giving the student a 100% mortgage, but then putting a charge against the parental home to cover the risk.
Let’s say a student wants to buy a £120,000 three-bed in Manchester, and has parents who live in Brighton in a house valued at £600,000. Rather than demand a £30,000 deposit, the building society puts a charge of £30,000 against the property in Brighton, then lends the student the entire £120,000 for the home in Manchester. The parents don’t actually have to pay anything upfront but are liable for the entire loan if the regular monthly payments are not kept up.
A £120,000 mortgage on an interest-only basis will cost a student £500 a month – relatively easily covered by the rent from letting out a couple of rooms in the house, and allowing the young owner to live rent-free.
Steve Matthews of Bath building society, the first lender in the UK market, says it has lent £40m to student buyers since 2006, and arrears have been almost invisible. “They are very good landlords. They may be very young but, because they own the property rather than renting it, they look after it well.
“For the student buyer, it’s their principal residence, so it’s not the same as a buy-to-let mortgage. There is little or no stamp duty, there’s no capital gains tax on sale, and the rental income is very likely to be free of tax because the student has their own personal tax allowance [£12,500] and the tax-free rent-a-room allowance [£7,500]. In effect, it’s a large tax-free income.”
The interest rate on the loans can be high – typically 4.8% variable – and if base rates rise these loans could become quite costly.
But mortgage brokers are enthusiastic. Chris Sykes of the broker Private Finance says: “For a student with an entrepreneurial brain and who has inheritance/savings/a gift or equity from parents, this could well be the perfect opportunity to get a secondary income stream early in life and maybe even allow them to pursue other business ideas due to having a stable inflow of income.
“It may also allow them to make enough to not have to take additional student loans, with someone else funding the mortgage with their rent.”
The schemes tend to have a minimum loan size of £90,000 to £125,000, and a maximum of £300,000 to £400,000. Buyers are also limited to three-bedroom houses, with no HMOs (houses in multiple occupation, usually five to six bedders) allowed.
The student needs to be happy to take on the mantle of landlord as well
What happens at the end of the student’s university years? Matthews says about 50-60% sell up on leaving college, with the rest either leaving the property rented out or making it their permanent home.
David Hollingworth of broker firm London & Country warns about the costs of buying and selling over a relatively short timeframe. “The student needs to be happy to take on the mantle of landlord as well, and it will also be important to consider the costs of buying and selling property. However, those that are likely to be studying for some time or are considering staying on after university could find they have the chance of home ownership before they thought it was possible.”