Last reviewed on 18th April 2022
University mortgages can be a great stepping stone for students wanting to get on the property ladder. Although there are lots of schemes available for first-time buyers, university mortgages are specifically made for students.
It’s also possible to get a 100% mortgage, however parents will need to offer security. Furthermore, students are also able to make an income from the property which can make flying the nest that little bit easier.
Explore our article to find out more, or make an enquiry to speak to an advisor.
What is a university mortgage?
A university mortgage is a loan used by students to purchase a property to live in whilst they study. Students may also be able to rent out rooms to other students, depending on the nature of the home they’ve purchased. This type of mortgage can also be referred to as a student mortgage.
For students to be approved, parents must offer security to their mortgage provider. Security can be in the form of a deposit or equity in a property, such as their family home. This isn’t to be confused with a guarantor mortgage. Although there are similarities, a university mortgage is specifically designed for students to purchase a home whilst they study.
Lenders that offer university mortgages also insist that properties:
- Don’t have more than three or four rooms (depending on the lender)
- Must be in close proximity to the university
- Aren’t flats or studio apartments (preferably houses)
Read more: How to get a mortgage with a guarantor
University mortgage rates and fees
A university mortgage term is currently set to three or five years on an interest-only basis. Once students graduate, the property can either be remortgaged or sold. Security from parents can also be removed. This can be done through a regular mortgage after you’ve graduated.
Student mortgages are still in their infancy and there are only a handful of lenders that offer them. The good news is that providers may offer 100% loan to value mortgages.
Although this may look like a brilliant deal, the rates on offer may not be as competitive when compared to using a deposit. For instance, using a 20% deposit may unlock better rates than a 100% LTV deal. Furthermore, security from parents won’t be needed if you have a 20% minimum deposit.
Loans are also capped at £300,000, which may not be enough for a student property, depending on the location. You’ll also only be able to borrow the £300,000 maximum if you meet the lender’s affordability checks. This is often based on parental income and the rental income that the student property has the potential to generate.
What can be used as security for a student mortgage?
If you don’t quite have a 20% deposit, then lenders will need security to the equivalent of 20%. This is so that lenders minimise their risk in the event that the mortgage isn’t repaid.
Security can usually be in the form of:
- Depositing funds into a savings account
- Equity in an existing property
- A combination of both funds and equity
You may wonder why a lender would request you to deposit funds into an account if you don’t quite have a deposit. This is because although they’d both require you to have 20% of the property value, they are different.
For instance, you’d be depositing 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 that have savings but don’t necessarily want to commit to spending their savings on a property deposit. This is because the funds are simply transferring bank accounts and would still be yours.
That being said, your 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, then certain lenders may allow you to use your property as security.
Lenders would place a second charge on your property equivalent to a 20% deposit. This is quite risky as you could lose your home if you defaulted on repaying the mortgage.
Risks that you need to be aware of
University mortgages can be a great way to both make an income and help a child on the property ladder, but there are risks involved.
100% LTV mortgages are very risky. If your property drops in value, then you could be left in negative equity. This isn’t a great position to be in as you’ll struggle to remortgage or cover the balance of the loan if you decided to sell. You then risk losing any savings you’ve deposited as security. Even worse, you could also lose your home if your security is in the form of equity.
The rates for student mortgages are generally higher than regular mortgages. This is largely due to the increased risk lenders are facing. Furthermore, lenders are aware you’ll be making an income from the property so in theory, should be able to cover slightly higher interest rates.
Letting rooms to students is a very competitive market, with many landlords keen to make a profit. You should be prepared for a worst-case scenario, such as having empty rooms or void periods, as this is a possibility. Would you be able to repay your mortgage if some rooms were left empty? Lenders will no doubt do their own assessments, but you also need to have a contingency if things go wrong.
Do students need to pay stamp duty?
Students won’t need to pay stamp duty as it’s likely they’re buying their first property. Parents won’t be liable for stamp duty as they’re not purchasing a second property. Parents will be providing security for the mortgage, but that’s as far as it goes.
As it’s not technically a second home, they’ll be no stamp duty to pay which can save a lot of money towards the costs of starting a mortgage.
On the other hand, if you wish to purchase a buy to let property for your child to occupy whilst they study, then you’ll need to pay stamp duty. This is because the mortgage will be in your name and as a homeowner already, you’ll be liable for stamp duty. Nonetheless, getting a buy to let mortgage on a student property does have some advantages and is a lot less restricted.
University mortgage specialists
Speaking to an advisor that is experienced in student mortgages can save you a lot of money over your mortgage term. It’s always a good idea to speak to an expert in their field and mortgages are no different. A mortgage is perhaps the largest financial commitment you’ll have to make, so it makes sense to speak to an expert.
There aren’t a lot of lenders that currently offer university mortgages for students. Experienced brokers are able to gain an understanding of the type of mortgage you need and can also secure you the best possible rate you qualify for.
You can start by making an enquiry below and an advisor will call you back to discuss your options.