Thinking Of Purchasing A BTL Property Near Your Child’s University? Key Things To Consider

With students facing an increasing amount of debt, parents may consider the idea of purchasing a buy-to -let (BTL) property near their child’s university to help reduce living costs, writes Stephanie Thayer, an Associate Mortgage Adviser at Progeny.

Whilst recent times have been difficult for homeowners and landlords alike due to high inflation and rising interest rates, landlord confidence rebounded in the third quarter of 2023 according to data from Paragon Bank.

Here are some key things for parents to take into account, in relation to funding a student home for their child.

Mortgage options.

The first thing to be aware of is that organising a mortgage to purchase a property that will be let to a member of your family is not as simple as taking out a typical buy-to-let mortgage with a traditional lender. The Financial Conduct Authority (FCA) defines this type of mortgage as a ‘regulated buy-to-let’ and affordability for this new mortgage will be based on parents’ household income and expenditure, rather than anticipated rental income. Not all mortgage lenders offer regulated buy-to-let mortgages, so it’s important that you speak with a knowledgeable mortgage adviser to discuss your options and assess affordability.

Other costs to consider

If you already own your own home, purchasing an additional property will mean paying higher rates of stamp duty than when buying and selling. In England and Wales, an extra 3% tax is applicable on the value of the property and in Scotland, you’ll be faced with an extra 6%.

As with any land transaction, there will also be legal fees to pay.

Specialist mortgage lenders often charge higher product fees and/or application fees than mainstream lenders and so this is another cost to consider.

If you plan to let the property to your child and others, it would be prudent to employ the services of a reputable letting agent in the area to help with putting together tenancy agreements and dealing with other regulatory requirements.

What other options are available?

Some parents may prefer to help their child get on the property ladder in their own right, rather than invest in a property in their own name. Typically, a student without earned income could not qualify for their own mortgage, however there are specialist mortgages that can help in this situation.

A guarantor mortgage is designed to help first-time buyers with low or no income get on to the property ladder via another person agreeing to legally take on the responsibility for repayments if the mortgage holder can’t pay. Parental income and expenditure will be considered in conjunction with any income that the student might have, and the bank will assess mortgage affordability based on all income streams. In the case of a full-time student, affordability will be based solely on the parental income.

It is a requirement that the guarantor takes independent legal advice to ensure that they fully understand the legal obligation of providing a guarantee.

Once the student has graduated and started their career, if they are able to service a mortgage alone, then a more mainstream lender can be approached for a remortgage. As the property is owned by the child and the mortgage is in their name only, parents would not be liable to pay a second property tax if they already own their own home. As with regulated buy-to-lets, not all mortgage lenders offer this specialist type of mortgage and there are certain income criteria that need to be met.

Purchasing a property for your child and university friends to live in can offer them great stability as well as the opportunity to benefit from a buy-to-let investment or even get your child on to the property ladder. It’s important however to understand all the implications and it’s best to speak to an experienced mortgage adviser to help navigate this more specialist marketplace.