It may appear a bizarre concept on the surface, but student BTL mortgages do exist, the idea being that with a ‘student mortgage’ you purchase a property with no down payment and earn money by renting it out to your friends.
Only because it is technically possible does not necessarily make it an appropriate pathway for most students; covering living costs is a real concern for most university attendees, but purchasing a property to rent out is not without its complexities.
An interesting proposition
Several small lenders have put together a range of innovative products aimed exclusively at students. Examples of this include Bath, Loughborough, and Vernon building societies, all of which provide students with the opportunity to buy a home with no deposit required.
Those taking advantage of the products will subsequently be able to rent space in their properties to other students in order to cover the mortgage payments.
‘Mortgages and students are not usually two things that you’d associate as a package,’ commented L&C Mortgages associate director, David Hollingworth.
‘Students are unlikely to have much if any income and therefore will always struggle to meet the primary requirement of a mortgage lender in demonstrating affordability to take on a mortgage,’
‘They also aren’t likely to have a deposit to use a buy-to-let mortgage, let alone the minimum income or homeownership that many lenders would expect,’
‘These issues have seen some lenders offer students a chance to buy a property rather than rent, but with the help of their parents.’
How the scheme works
Eligible applicants are offered a loan to purchase a property with an LTV of 100%, meaning no deposit is required. A guarantor is required to co-sign the mortgage agreement along with the student, typically a family member.
The funds can subsequently be used to purchase a property and rent out spare rooms to friends or other students. From there, monthly payments are collected to both cover the mortgage repayments and make money to cover the owner’s living costs.
‘’The mortgage amount is based on the rental income the property could yield from letting out the spare rooms.
‘The guarantor will be on the mortgage deeds but not on the property deeds, and their income can be used to help the application,’ explains Chris Sykes, associate director and mortgage consultant at Private Finance.
‘If no deposit is available, then the guarantor can either put money on account with the lender to the value of 20 per cent of the mortgage or they can use their own home as security for the loan.’
An attractive initiative, but must be carefully considered from a longer-term perspective. The ongoing costs of homeownership are at an all-time high in the UK, as are those of running a BTL business of any kind.
Anyone interested in becoming a student landlord is therefore advised to seek independent broker support in order to establish their suitability and determine whether it is something they can realistically afford.