Students can buy a house for free at zero deposit? What is Buy for Uni mortgage?!
Students, listen up, what If I tell you that you can buy a house with no deposit and practically free?
You’re probably thinking, hold on a minute, that cannot be, surely? It cannot be that simple.
Well it is true but yes it is not so simple.
In this blog we will talk about a student mortgage also known as buy for uni mortgage, what are the downfalls, what are the benefits and how you can get the most out of it. Let's get into it.
Before we go any further I will remind you that I am not a mortgage advisor or a financial advisor. So you need to talk to a specialist mortgage broker or financial advisor for specific advice before making decisions.
What we are talking about here is a buy for uni mortgage. Some lenders have decided to give students a chance to get on the property ladder, providing that they have a UK based guarantor.
In some cases it is even possible to get 100% of the mortgage without deposit, providing that your guarantor uses their own home or their investment home as security for loan or they have to put down 20% typically.
Your guarantor will be on the mortgage deeds but not on the property deeds and meaning their income can be used to help the application. In other words they will be taking on all the risks that come with mortgage payments and they will not benefit any up-lift in value or profit made in sales of property later on.
So your parents got to love you.
What are the main criterias?
First thing is you must have at least one year left at university to apply for it and as far as I know it works for PhD students as well.
They must have a UK based guarantor.
The property needs to be within 10 miles of a university campus
And it has to be two to 4 bedrooms because anything more than 4 will need a license and they do not want licensed HMOs as it cannot be considered your residential home living with lodgers. Your property will need to be HMO standard and meet fire regulations standard etc. It is also worth checking with your local council before you even consider buying the property. What are their rules on having lodgers?
Essentially you’ll be renting the other 3 rooms out to cover the mortgage and the rest.
So what are the main benefits other than getting a house for free?
If you are a student, you probably spend a lot of money on rent. So this could be a cost effective way of renting and potentially, if you are good and savvy you might even make a good amount of profit each month.
Being a fast time buyer students won’t be paying stamp duty for purchases under 300k.
When it comes to selling you won't have to pay capital gain tax on the increase in value from when you buy. So what if you can uplift the value or even better what if you can buy it below market value since day 1. When it comes to selling you might make a good chunk of money.
You also have a choice of capital repayment or interest only repayment options. Interest rates are low at 4.2 percent for 100% mortgage offered by bath building society subject to terms and conditions. But good rates nevertheless.
Choosing an interest only mortgage means you pay less than capital repayment. For example for a 250k house you may pay around £875 a month mortgage compared to capital repayment which is around £1200 a month. However, you have to be sure the property won’t go down in value, and you have not repaid the capital so you can get into negative equity which is risky. So you have to do research and analysis and buy in a good area. Other options that savvy professionals do is buying it below market value since day 1 keeping the equity locked in hedged against potential market fluctuations or adding value to it while we have it which can be harder because of terms and conditions on the mortgage. But if you are savvy enough you can always find ways.
You may also want to find ways to maximize your rental to cover all costs. Some nice interior decorations, size of the rooms and adding an ensuite bathroom usually uplift rents but again you have to analyse cost against profit so that you do not overspend.
Buying the right property at the right price is crucial. This is where the professionals like us come in. Not estate agent because estate agents work for sellers and they want the max. No offense to lovely estate agents. I still love you.
What are the downsides?
Downside is that just running the property as a rental can be difficult, imagine your mates take the mick and host parties regularly at your home. What if the boilers break down or something happens, there will be no landlord taking care of those things. You will have to be a responsible adult.
Your first time buyer advantage will be used up so you will not get the same discount when you buy the next home.
Now the most important part, what happens when you leave university?
Well buy for uni mortgage is designed specifically for students to take ownership of a property while studying. You cannot continue with this after your studies.
So you got 3 exit options
Sell – hopefully you have capital appreciation by the end of your studies but in case it is not, it is always advisable to buy it at the discount price to hedge the risk. Or add value but it depends on mortgage conditions. I am not a mortgage expert. Good thing is you won’t pay capital gains tax if you sell with an increased value compared to when you bought it. Yay!
Exit on residential mortgage and put down 5% - Now depending on the price of the property 5% can be too big. So you may need help from your relatives. Or if you buy it below market value, say 10%, when it comes to refinancing, assuming the value hasn’t gone down more than 5% You may have a free house due to the difference in property valuation.
Exit on Buy 2 let mortgage and use the property as a rental. Now with this one you will need 20% minimum deposit and that can be quite chunky. So you’ve got to think twice with this one.
My final advise is whatever you do, think and plan carefully, do the numbers. Talk to professionals, take advise. Have plan A and Plan B for exit options.