University students above the age of 18 can now apply for a property-buying scheme that allows them to become landlords, as long as they are guaranteed by their close relatives.
According to The Guardian, the “Buy for Uni” scheme is a new mortgage deal from The Loughborough Building Society (Loughborough BS), which promises up to 100 percent financing for students in England and Wales to purchase a property, so long as close family members provide security.
The deal enables them to get a loan of up to £300,000 if the mortgaged property is within 10 miles of their university, with slightly higher interest rates than usual at 4.54 percent and 4.74 percent, according to the security provided and mortgage term.
Parents, step-parents or grandparents, must act as guarantors through providing security in cash or equity in a property, if the loan is valued at 80 percent more than the property.
To repay the loan, students have to assume the role of a landlord. By renting the spare rooms in the house out, the rental income is expected to cover the cost of the repayments.
“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’,” Chief Executive of the Loughborough BS, Gary Brebner said to The Guardian.
Others are not convinced that rent alone will cover the repayment costs. Alistair Hargreaves, executive mortgage protection consultant at brokers John Charcol said: “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.”
This deal is not the first of its kind – the Bath Building Society (Bath BS) has been offering a similar product for nine years to date. Bath BS says the loans now account for about 10 percent of its mortgage business.
As with Loughborough’s, parents need to act as the loan’s guarantors to bring the loan-to-value ratio down to 75 percent. Thus, if a student wants to take out a 100 percent mortgage to buy a property worth £200,000, the parents must provide a £50,000 charge on a property.
Targeted at serious, middle-class students
According to the building societies, these loans are not aimed at the general student population – only those who want and can afford to be committed to it.
“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,” said Bath BS’ Chief Executive, Dick Jenkins.
“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.”
The loan’s dependence on a student-parental bond makes such loans one of the better performing ones for the lenders. In all the years that Bath BS has partaken in these loans, they have never had a “problem case” according to Jenkins.
“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,” Jenkins said.
While the mortgage offer can seem like a great deal – setting up students to graduate as a homeowner – student unions have voiced their concerns over the viability of taking up a mortgage at such a young age. Undergraduates are urged to be mindful of what they are signing up for here.
“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.
According to the lenders, they are also cautious over who they give the loans to and the level of clarity in the student’s understanding of the loan – not every student will qualify.
Just in case you were worried that uni could be a tool for social mobility – rich students buy flats via poor mates. https://t.co/xtm50k9Anz
— Kate Webb (@KateBWebb) February 27, 2017
“When we meet someone, we want to be sure that they know what they are doing,” Brebner 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,” Brebner added.