Make the grade, and you'll pass directly to home ownership
Sunday 23 April 2006
Most students won't have a full-time job, and those under 21 are unlikely to have built up any savings. At their age, who can blame them?
But that hasn't stopped one lender from launching a new mortgage specifically for undergraduates to help them get a foot on the property ladder.
The mortgage - called Buy for Uni - from Bath building society is exclusively for university students, and aims to help re-ignite demand among first-timer buyers by offering 100 per cent loans.
First-timers make up only 38 per cent of UK homebuyers at present, according to the Council of Mortgage Lenders, compared with a 45-50 per cent longer-term average.
But students shouldn't get too excited at the prospect of instant home ownership: the new deal has strings attached.
Since most students don't receive a salary, loan affordability is calculated on rental income from no more than four rooms in the house - and the property mustn't be more than 10 miles from campus.
Critically, the total rent must be at least 7 per cent of the original loan. (This figure is based on the Bank of England base rate plus 2.5 per cent, and will therefore rise if rates go up.) To borrow £150,000, for example, an income of £875 a month would be required from all rooms, including that of the borrower, who must pay rent too.
In addition, both parents of the student must act as guarantors for the entire loan. On top of this, if the loan exceeds 75 per cent of the value of the property, the mortgage must also be secured against 25 per cent of the parents' property.
This extra security is in place of the more usual mortgage indemnity guarantee, a fee some lenders charge on mortgages that represent a high percentage of the property value.
Finally, the building society does not accept mortgage repayments from a student current account. They must come from one linked to a parent's salary.
If students meet the above criteria, what rates can they expect to pay? The mortgage is available on a two- or three-year discount basis, both priced at 5.4 per cent before reverting back to the lender's standard variable rate (currently 6.5 per cent).
Tie-ins run for the same period as the respective deals; if a student is taking a longer course - a degree in veterinary medicine, for example - deals can be arranged for that length of time.
On graduation, the property can be retained as a buy-to-let investment under the same lender. In this case, the graduate must be earning at least £15,000 (with the same rent "percentage" requirement).
Alternatively, the graduate can continue living in the property with other student sharers. Here, salary is irrelevant providing the rental income, guarantors and potential 25 per cent collateral charge continue to stack up.
Although Buy for Uni is available only directly from the lender, mortgage brokers broadly support it. "Any opportunity to get on the ladder is welcome," says James Cotton at broker London & Country. "But a deal like this should be thought through carefully - 18 is young to take on a mortgage commitment, especially with a 100 per cent loan."
James Langsford, 28, is a mature student at the University of Bath taking a degree in business administration. He and his fiancée, Dawn Earp, 30 - also a student - are househunting and hope to get a Buy for Uni loan.
"We are looking at spending £160,000 for a three-bed house, sharing one room and letting two out," James says. "We can't see any other way of getting on the ladder in the near future."
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