Last reviewed on 29th November 2023 by Martin Alexander (Mortgage Advisor)
University mortgages can be a great stepping stone for students wanting to climb the property ladder. Although many schemes are available for first-time buyers, university mortgages are made just for students.
Getting a 100% mortgage is also possible, but parents must offer security. Furthermore, students can make an income from the property, making flying the nest easier. Explore our article to learn more, or make an enquiry to speak to an advisor.
What is a university mortgage?
A university mortgage is for students to buy a property while studying. It’s sometimes called a student mortgage or Buy for Uni mortgage, depending on the lender.
For students to be approved, parents must offer security to their mortgage provider. Security can be a deposit or equity in a property, such as their family home. It works in the same way as a joint borrower sole proprietor mortgage.
With the mortgage, students can rent out rooms to other students, depending on the nature of the home they’ve purchased. The rental income can sometimes be enough to pay the entire mortgage.
Lenders that offer university mortgages insist that properties:
- Don’t have more than three or four rooms (depending on the lender)
- Must be within ten miles of the university
- Aren’t flats or studio apartments (preferably houses)
Can I get a 100% university mortgage?
Student mortgages are still in their infancy, and only a handful of lenders offer them. The good news is that providers do offer 100% loan-to-value mortgages.
To be eligible, you must be a UK resident and at least 18 to apply. You’ll also need at least one full academic year left on your course when your mortgage begins.
Although this may look like a brilliant deal, the rates on offer are less competitive than using a deposit. For instance, a 20% deposit will unlock better rates than a 100% LTV deal, and parents won’t need to give a lender security.
What can parents use as security for a student mortgage?
If you don’t quite have a 20% deposit, lenders will need security to minimise their risk if the mortgage isn’t paid, such as:
- Cash security – Depositing funds into a savings account
- Collateral security – Equity in an existing property, up to the equivalent of a 20% deposit
You can also use a combination of cash and equity. The total value of this must be at least 20% of the property value.
How does cash security work?
Cash security differs from a mortgage deposit, as you’d deposit funds into your lender’s nominated account rather than spending money on a deposit. Funds are then retained there as security for the duration of the mortgage.
This arrangement can suit parents who have savings but want to avoid committing to spending their savings on a property deposit. Savings simply switch bank accounts and would still be yours. You’d also avoid paying stamp duty using cash security over a mortgage deposit.
Savings may not earn any interest, and you certainly won’t be able to make withdrawals. If you don’t have a 20% deposit but have equity in a property, you can use your property as security.
How does collateral security work?
Lenders would place a second charge on your property, equivalent to a 20% deposit. This is risky as you could lose your home if you defaulted on the mortgage.
Once you graduate, the property can either be remortgaged or sold. Your parents can also remove their security by switching to a regular mortgage after you’ve graduated.
University mortgage rates and fees
University mortgage rates can be higher than usual due to the nature of the loan. Interest rates are typically between 6% and 8% and are available on interest-only or repayment options.
Product fees can range between £500 and £1000, with most lenders offering free valuations.
Risks that you need to be aware of
University mortgages can be a great way to make an income and help a child on the property ladder, but risks are involved.
100% LTV mortgages are high risk. You could be left in negative equity if your property drops in value. If this happens, you’ll struggle to remortgage or settle the mortgage balance if you decide to sell.
You risk losing any savings you’ve deposited as security. Even worse, you could lose your home if you’ve provided equity as collateral.
The rates for student mortgages are generally higher than regular mortgages. This is mainly due to the increased risk lenders are facing. Furthermore, lenders understand you’ll be making an income from the property, so you should be able to cover slightly higher interest rates.
Letting rooms to students is a very competitive market, with many landlords keen to profit. You should be prepared for a worst-case scenario, such as having empty rooms or void periods. Can you repay your mortgage if some rooms weren’t tenanted? Lenders will undoubtedly do their assessments, but you also need a contingency if things go wrong.
Alternatives to student mortgages
There are alternatives to consider. Although they’re not aimed at students, you can still get a mortgage to buy a home for university with the options listed.
Your parents can act as guarantors for a mortgage and must provide security to be eligible. Although there are similarities to a university mortgage, they’re not the same. Lenders each have different products for guarantors and those that want university mortgages.
Read more: What is a guarantor mortgage?
Gifted deposit mortgage
If your parents can gift you a mortgage deposit, you could buy a student property as your first home. Not all lenders will allow this, but some will. Mortgage rates are often better with a gifted deposit, so it’s worth checking your options before applying.
Buy to let mortgage
If you wish to purchase a buy to let property for your child while they study, you’ll need to pay stamp duty. This is because all homeowners are liable for stamp duty on second properties. Nonetheless, getting a buy to let mortgage on a student property has advantages and is much less restricted than a uni mortgage.
Do students need to pay stamp duty?
Students won’t need to pay stamp duty as they’re likely buying their first property. Parents won’t be liable for stamp duty as they’re not purchasing a second property. Parents will provide security for the mortgage, but that’s as far as it goes.
As it’s not technically a second home, there’ll be no stamp duty to pay, which can save a lot of money for starting a mortgage. This is an advantage of using security rather than a deposit for a mortgage, as a mortgage in your parent’s name would indicate a second property.
University mortgage specialists
Speaking to an advisor with experience in student mortgages can save you a lot of money over your mortgage term. A mortgage is the largest financial commitment you’ll have to make, so it makes sense to speak to an expert.
There are only a few lenders that currently offer university mortgages for students. Experienced brokers can gain an understanding of the type of mortgage you need to find the best possible rate you qualify for. You can start by making an enquiry, and an advisor will call you back to discuss your options.
About the author
Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.