Profits and the pitfalls of buying a student home

David Prosser on the ins and outs of one way to ensure your child leaves college without being in debt

"As more teenagers go into higher education, there is less university-provided accommodation to go round," warns Melanie Bien, an associate director of estate agent Savills. "Our research reveals that in the 2003-04 academic year, British universities provided accommodation for less than a quarter of the potential demand."

This shortfall is one reason why more families are now considering buying property in the towns where their children are headed. The most common strategy is to buy a house with several bedrooms - the student can live in one room and rent out the others to help cover some or all of the mortgage payments.

During the past five years, as the table belowshows, families who have bought student accommodation have almost all earned handsome profits. In most cases, students will have made enough to pay off any debts they have incurred while away at college.

The gains have been made in most areas of the country, but towns with new universities have benefited most according to Halifax Estate Agents. However, even beyond the biggest gainers, house prices more than doubled between 1999 and 2004 in student towns including Cambridge, Manchester, Durham, Birmingham, Edinburgh and Bristol.

Since last year, however, house price inflation in most parts of Britain has slowed, with some areas even reporting falls. So would this year's freshers be making a mistake in buying property as an investment - as well as a place to live - over the duration of their course?

John Wriglesworth, an economist at property analyst Hometrack, is optimistic. His projections for house price growth in Britain's biggest university towns are bullish. Wriglesworth's top tip is Warwick, where he expects prices to rise by 20 per cent over the next three years, closely followed by Leeds, where his forecast is for average gains of 19 per cent.

Hometrack's forecasts cover Britain's 15 biggest university towns and cities, from Exeter in the south to Durham in the north. Its lowest projection for the next three years is 7 per cent growth from London and Sheffield, suggesting parents who buy now are making decent investments.

However, for those families that do take the plunge, the mechanics of the process can be tricky, warns Bien. "You may save on your child's rent but can you afford to buy a property for them to live in?" she warns. "You can't necessarily use a standard buy-to-let loan because these often don't allow relatives to live in the property."

Bien also points out that owning a property that is let out - even to children and their student friends - can be hard work. "Who is going to look after the property and be responsible for the day-to-day running of it?" she says. "Are you happy to leave it to your child to fill the rooms? Is your child happy to ensure the rent is paid on time each month and that the property is kept in good condition?"

Also bear in mind that local authorities - and universities themselves - enforce strict rules on rented property. Accommodation will need to meet health and safety standards and comply with fire regulations. Landlords that break the rules can be prosecuted.

However, help is available. Local authorities offer advice on how to ensure your property complies with all the regulation. It may also be possible to employ a professional managing agent, if you would rather your child was treated as just another tenant.

As for buying the property in the first place, David Hollingworth, a director of independent mortgage adviser London & Country, says some lenders are prepared to be flexible. "One option is for the property to be in the child's name, with the parents acting as guarantors on the mortgage," he says. "Or mums and dads can buy the house."

In most cases, the former route is preferable, Hollingworth argues. Profits on second homes are potentially subject to 40 per cent capital gains tax, so holding the property in the student's name is a sensible way to avoid a large bill from Customs & Revenue. Also, the deposit needed for a guarantor mortgage is likely to be smaller than for a buy-to-let loan, which will help many parents.

However, Hollingworth warns lenders will want to be sure that the guarantors of a mortgage are capable of meeting the repayments in addition to liabilities of their own - an existing mortgage, for example.

Parents buying a house that a child will live in may find it difficult to get a buy-to-let mortgage. Lenders are nervous because buy-to-let investment is more closely regulated if you are renting to a relative.

Even so, Hollingworth says lenders such as Bradford & Bingley will consider such deals, or it may be possible to get a standard residential mortgage. For guarantor mortgages, meanwhile, he recommends NatWest and Cheltenham & Gloucester.

Savills, meanwhile, currently recommends standard mortgages from Alliance & Leicester - its two-year tracker deal costs 4.34 per cent - and Newcastle and Cheltenham & Gloucester - both good value for fixed rates. Bien suggests The Mortgage Works as a possible buy-to-let lender.

Finally, hiring an accountant is a good idea. Rental income on property is potentially taxable, whether it is paid to parents or their children. The rent-a-room scheme provides tax breaks to people who let out accommodation within their homes.

'The rent covered my mortgage bills'

Sally Russell was so fed up with poor-quality rented housing after two years at Southampton University she decided to buy her own place.

"By the beginning of my third year, I knew I would be staying on to do a Masters, so I decided buying made sense," she says.

She bought a three-bedroom house and converted a downstairs reception room into an additional bedroom so that she was able to house three tenants.

"My parents helped me to do all the homework and the rent covered the cost of my interest-only mortgage."

Sally, now 23, left Southampton at the end of 2003/4 academic year to work as an education officer at Chertsey Museum, Surrey.

Her house has been rented to the same group of students ever since, but they plan to leave at the end of 2005/6, and Sally then plans to sell up.

She paid £105,000 for the property three years ago; similar houses are now selling for up to £190,000.

The profit will be enough to cover Sally's student loans, though she has since bought a home in Surrey and intends to use the money to reduce the mortgage on this.

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