After three or four years of study, many students will look with resignation at bank statements showing them thousands of pounds in debt. Raising enough for a deposit on a first property becomes a a distant thought as they tackle paying off their loans. Unless, that is, they are homeowners already.
Lenders are now looking at students as not just customers for university loans, but also for early mortgages – effectively turning them into landlords.
The new “Buy for Uni” mortgage from The Loughborough Building Society promises up to 100% financing for a property purchase, if close relatives provide security.
A similar product has been on offer through Bath Building Society for some years, but both have been met with calls for caution by students’ representatives.
Under the Buy for Uni deal students who are over 18 in higher education in England and Wales can get a loan for up to £300,000 if the property is within 10 miles of where they study.
Behind them must be members of their immediate family – parents, step-parents or grandparents – who can provide security in cash or equity in a property, such as the family home, if the loan is for more than 80% of the value of the property. Interest rates range between 4.54% and 4.74% depending on what security is provided and the term of the mortgage.
Chief executive of the building society, Gary Brebner, says the mortgage acts as a gateway product to get on the property ladder. After the three- or five-year term, when the student will have graduated, it is expected to change into a more traditional mortgage.
Unlikely as it is that minimum wage shifts in the students’ union bar will cover the repayments, the student instead becomes a landlord, earning money from the spare rooms by renting them out.
Not everyone has the parental equity to put in… and we do get a little flak about whether it’s elitist Dick Jenkins, Bath BS
“What you want is that the rental income … covers more than the commitment, so if there is a rise in interest rates it will cover it. Or that the guarantor says ‘Well, yes, if interest rates did go up, or there was a void in rent, I the guarantor will pay that rent instead’,” says Brebner,.he adds that they have had substantial interest in the offer, but no money has yet been lent.
In Bath, however, the model has been going for nine years. Bath BS says the loans now account for about 10% of its mortgage business. Again, a guarantee is needed from parents to bring the loan-to-value ratio down to 75%.
This means that if a student wants to take out a 100% mortgage to buy a £200,000 property, the parents must provide a £50,000 charge on a property.
Chief executive Dick Jenkins says that in most instances the rental income goes “a long way towards” covering the repayments, working better in some towns than others.
“We do come across the occasional person who thinks that we are offering them an enormous amount of beer money, but we obviously disabuse them of that notion quickly,” he says. “Most people are pretty serious and switched on and tend to come from reasonably well-off families because we do need to take a collateral charge over mum and dad’s property to make
that product work, so there has to be some equity in the parents’ property.
Some building societies are willing to lend undergraduates 100% of the cost, up to £300,000, to buy a home – with certain guarantees
“In some senses that defines you as approaching more middle-class households than working class, but that does not mean it is not a valid product for a given segment of the population.”
Students’ representatives have moved to make sure that undergraduates are aware of what they are getting themselves into when signing up for a mortgage at potentially a very young age.
“Students should be careful of offers that seem ‘too good to be true’. Buying a house will usually involve significant hidden costs for deposits, agents and surveyors, even if the monthly payments seem to compare well with rented properties,” says Shelly Asquith, vice president for welfare at the National Union of Students.
Jenkins says the product is not for everyone and acknowledges there has been criticism. “This is not a product that is available to all because not everybody has got the parental equity to put into the equation. But that is no reason not to help those who have. We do get a little bit of flak about whether it is an elitist product. I don’t think it is.
“But certainly, it works best for students who are probably on long courses who can get the best benefit out of it over a longer period.”
Most people are serious and switched on and tend to come from reasonably well-off families
However, despite the image of students as being more interested in happy hours than personal finance, Jenkins says that default rates on loans are much lower than on standard mortgages.
“We have found that the student-parental bond – that understanding that the parents and students have – means that if there is a payment problem we tend not to see it because it gets resolved before it gets to us. They sort it out between themselves. I can honestly say that in nine years we have never had a problem case.”
But are the mortgages saddling people with heavy debt at too young an age? Brebner is clear that they are not for everyone. “When we meet someone, we want to be sure that they know what they are doing,” he says. “It might be that their circumstances are not quite right. It might be their guarantor circumstances are not quite right.
“There are going to be a number of things which we will explore as part of this to make sure that anyone who takes this as an alternative to renting, or as an alternative to student accommodation, understands what they are getting into.
“We are not encouraging people to take on debt that they don’t understand or they wouldn’t understand their responsibilities towards. We are quite a cautious lender.”
WHAT THE EXPERTS SAY
We asked two mortgage experts to give their views on the loans for students:
Interest rates David Hollingworth from London & Country Mortgages says that as the loans are niche products, the interest rates are higher than would normally be expected. “The rates are higher than would typically be available to a first-time buyer, even where parental security is being used, such as the Barclays Family Springboard deal that offers a three-year fixed-rate of 2.99% up to 100% LTV with no fee where 10% parental cash is locked down as additional security. Both lenders offer the product on variable rates so there is less stability on offer, but nonetheless these deals could offer a very practical and smart solution to the right person,” he says.
If you’re a student who is becoming a landlord, you should study the facts and know the risks. Photograph: Don McPhee for the Guardian
Rental income This income on a property may not cover the stress tests, meaning the building society can look to parents’ income to ensure the repayments are covered. “If somebody doesn’t have any capital to go down on this and they have to put a charge against their property and someone is going to be at university for three or four years, I can see it making sense. I just think rents are not going to be enough to sustain it so mum and dad are going to have to have a decent income to back it up,” says Alistair Hargreaves, executive mortgage protection consultant at brokers John Charcol.
Stamp duty One benefit is that the property will be in the child’s name. “That avoids any potential stamp duty land tax surcharge on the purchase of additional property, if the parent already owns their own home,” explains Hollingworth.
Dangers Parents, however, need to understand the effects of providing the security, he emphasises. “If everything went horribly wrong, the property was repossessed and sold for less than the outstanding debt, the lender could claim the shortfall from the parental cash or equity. In addition, where the parent is using their property as the additional collateral, it could have an impact on any future borrowing against their own home. Where using cash as security, the funds will remain in the parental names, but will not be accessible while they remain as security.”
Rob’s comments. I hope to see this type in mortgage in Scotland soon.