Buy to let mortgage on a student property

Published 6th January 2020 · Updated 7th September 2023 by Martin Alexander

Investment in student buy-to-let is popular, and it’s no surprise. Even with the Bank of England base rate increasing, there are still some great buy-to-let deals available. While savings in the bank are gaining small returns, buy-to-let investors are cashing in, and some are earning over a 10% yield by letting to students.

Rent from a property can provide a long-term income. Many landlords decide on an HMO model where several students share a single property. Rather than charging rent for the entire property, students pay rent for each room, which can soon add up.

A great property investment starts with the right mortgage. After all, you’re in this to make money! With thousands of buy-to-let deals to choose from, how can you be sure you’re getting the very best mortgage possible? Well, now you can.

Our advisors specialise in student buy-to-let mortgages and have helped many landlords nationwide secure great deals. With so many different types of mortgages available, our specialists will find the exact mortgage you need.

What is a student buy-to-let mortgage?

A student buy-to-let mortgage is a loan used to purchase a property that is then rented to students. This mortgage type is popular with landlords aiming to maximise their rental income. Landlords can do this, as a student home is typically set up as an HMO (house in multiple occupation).

There are a wide variety of mortgage types to choose from when investing in student accommodation. For instance, you may wish to purchase a regular property, which you can convert into an HMO. This can involve restructuring the internal aspect of the property so that you can maximise the number of rooms you can offer students.

In comparison, you may want to purchase purpose-built accommodation already suited for students, such as flats or an apartment block. Depending on the type of student property you’re after, you may be better suited to a particular type of buy-to-let mortgage. This is where landlords can often go wrong, as they’ll take out a mortgage that isn’t the most suitable.

How to get a buy-to-let mortgage for a student property

You’ll first need to establish your budget and what you’ll be able to borrow. This will then give you an idea of the type of student property you can purchase.

Many lenders insist that student buy-to-let is explored by existing landlords and not first-time landlords. This is because student property investment isn’t to be taken lightly and is something experienced landlords will usually move on to once they’ve conquered regular buy-to-let.

As the saying goes, don’t walk before you can crawl, and it’s true under these circumstances. That doesn’t mean there aren’t lenders that won’t approve first-time landlords for student buy-to-let, but it’s important to know.

How much deposit will I need?

As with most mortgages, you’ll need a deposit to purchase a student property. Most lenders will require a deposit of at least 25%, but it’s recommended to use a higher deposit, such as 40%, to access the best deals. In other words, the more you can save for a deposit, the better interest rates you’ll be offered.

Some lenders may offer mortgages with less than a 25% deposit. Nevertheless, you’ll likely have to pay higher interest rates and fees.

Mortgage survey for a student HMO

It’s also a good idea to have extra funds available if things don’t go to plan. Many deals can fall through at the mortgage survey stage. Surveyors can value the property purely on bricks and mortar, resulting in a lower valuation than expected. This is likely to happen if you’ve applied with an unsuitable lender.

Lenders that understand you’re purchasing a student property, especially if it’s an HMO, should value the property based on the rental income it can achieve. This is crucial in ensuring you get the total mortgage amount you’ve applied for. Furthermore, you won’t have to put down a larger deposit because the property is undervalued.

Establishing your budget

Establish your budget before you begin your property search. The good news is that most buy-to-let lenders won’t require you to have an enormous personal income. Nonetheless, having a personal income will certainly help your application. Your income also shows lenders that you can pay the mortgage even if your student property has void periods.

The amount you can borrow will mainly depend on the rental income your student property can generate. Lenders will require the rental income to be at least 125% of the monthly mortgage.

For instance, if your mortgage is £500 per month, your property must fetch at least £625 per month (based on a stress test of 125%).

Meeting 125% of the mortgage should be manageable on a student buy-to-let. This is because you’ll receive rent from each room, which can range from anywhere between £200 and £600 per month (on average). Not all lenders have the same stress tests. If you need an HMO mortgage, your rental income may need to meet at least 180% of the mortgage amount. This is still quite manageable, given the circumstances.

You can speak to local letting agents to establish rental figures for the properties you’re interested in. This should give you an indication of the amount you’ll be able to borrow. You’ll still need a relatively good credit score, and as mentioned, you’ll require a 25% deposit. Even if you have bad credit, our specialists may still be able to help.

What types of property are suitable for student housing?

While it’s possible to let a regular home to students as a buy-to-let, investors typically use the following property types:

• Student HMOs (house in multiple occupation)
• PBSA (Purpose Built Student Accommodation)

Student HMOs

Most student properties are classed as HMOs because students often live together and share facilities such as a kitchen. This also works for landlords as you can rent a property to multiple tenants rather than renting a property to a single tenant. Doing so can significantly increase the rental value of a property.

You may also require an HMO licence if the property is let to five or more tenants or at least three stories high. This is a legal requirement, so getting a mortgage for a licenced HMO can be more difficult. That being said, some lenders specialise in mortgages such as these.

PBSA (Purpose Built Student Accommodation)

University halls are often classed as a PBSA. For instance, student apartment blocks with shared facilities such as a gym, games room and WIFI can be classed as a PBSA. This is because the primary purpose of the building is to house students, so the need to extend or convert the property is rare.

Units such as these are complex to purchase using a mortgage, and they’re rarely up for sale, as investors generally own the entire building. That being said, if you wanted to build an apartment block to house students, you could apply for development finance to fund the cost of the building.

What are the pros and cons of investing in student property?

Each mortgage type will have its pros and cons. As the main goal of student investment is typically to generate an income, understanding the advantages and potential drawbacks before applying is a must.

Pros of student investment

• Living in student accommodation can be expensive. So, parents can save money on paying rent but also charge rent to other students, making a profit and covering expenses for their kids throughout university.
• You don’t have to be a parent to invest in student accommodation. Typically, house prices rise and have almost doubled each decade since the early 90s. Furthermore, students will always need somewhere to live while they study, so investing around a university campus can be lucrative.
• University apartment blocks are typically popular with first-year students. More established students prefer student homes, such as HMOs, which they can share with friends and other students. In terms of popularity, student homes are certainly more desirable.
• Renting to students can offer a secure income, as guarantors and parents underwrite tenancy agreements. Some rental payments are paid in advance, with parents paying for terms at a time. As a result, mortgage payments can be made much easier and with less pressure.

Drawbacks of student investment

• Investing in a student property should be a long-term investment. If you have short-term investment goals, student property won’t be viable. Income from a student property can be great, but it can take a while to make a profit, as the outlay cost can be high.
• Student HMOs will require a larger start-up cost, as you’ll likely need to convert a home into an HMO. Even if you purchase an existing HMO, you may need to invest in modern furniture and decor.
• Management costs are also likely to be higher when compared to traditional buy-to-let investments. There can be differences between tenants sharing facilities, so you or the letting agent might have to mediate conflicts.
• Students tend to have parties, and most have never lived away, so getting used to keeping a house clean can take some time. As a result, you may find your maintenance and cleaning costs to be higher when compared to regular buy-to-let.
• There’s more legislation attached to student buy-to-let compared to traditional buy-to-let. You’ll need to be prepared for this, and failing to do so could result in huge fines and even imprisonment in extreme situations.

Buying a student property for your child

Buying a student property for a child is quite common. If you have savings in the bank, investing this into a student property can make financial sense. Your child can then live there while studying, which can save them money and, at the same time, provide you with an income.

There are a few things to consider, such as the stamp duty. Stamp duty for second homes is currently set at 3%. If you’d like to avoid this, there may be other ways to arrange the purchase to save money.

A mortgage with a gifted deposit would allow your child to become a homeowner. As you’re helping them onto the property ladder, you save money on stamp duty fees.

That being said, some lenders won’t allow a gifted deposit to be used for an HMO, even if you were acting as a guarantor. As a result, gifting a deposit would be more suitable for simply helping your child purchase accommodation for themselves in comparison to an investment. This is more commonly known as a university mortgage.

Can I rent a property to my child?

If you aim to purchase an HMO student property for investment and to provide accommodation for your child, you’ll need a family buy-to-let mortgage. Family buy-to-let, also known as regulated buy-to-let, is considered a niche type of mortgage.

Lenders can be quite hesitant when landlords rent to family members. This is because landlords are more likely to be lenient on rental payments with family than tenants they have no relationship with.

If you require a regulated buy-to-let mortgage, speak to an advisor before doing so, as they aren’t widely available.

Student buy-to-let experts

Investing in a student buy to let isn’t something you’d want to rush. Finding the right finance to fund your investment is crucial in ensuring your venture is successful. We often see landlords going to unsuitable lenders for their investment needs.

Student property investment involves so many different mortgage options that most landlords don’t know they exist. It’s worth speaking to an advisor who is experienced in this field and can help you find the right mortgage.