Sam Dunn: 'Is it still wise to buy a flat for our student daughter?'

House Doctor
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The Independent Online

Question: Our 19-year-old daughter has started her second year at Leeds University, but after months of nightmare landlord behaviour and rent issues, I'm keen to put down a deposit on a cheap flat for her and a friend. Is this possible? My wife and I have our own £58,000 mortgage but not much other debt, and £15,000 in savings. CI, Edinburgh



Answer: Tired of throwing away money on rent to lousy landlords, it's no wonder parents dream of buying a house for their offspring.

While house prices were rising, the maths was enticing for those who could stretch their finances: hold on to the home until your child graduates then sell for a profit or keep as an investment to let to new tenants.

University town prices usually rose at a higher rate than in the rest of the country: according to Halifax's survey of college cities, the average house price in Manchester – with the UK's largest student population – rose by 63 per cent in the five years to 2008 compared to 44 per cent for the rest of the country.

But for the near future that no longer looks a safe bet, with sliding house prices and painful mortgage rates. Yet, as your dilemma shows, it's not just about crunching the numbers: it's about ensuring your daughter is safe, happy and free to concentrate on her studies.

So as long as you're in for the long-haul, you've a number of options.

"A few lenders will allow you to take out a joint residential mortgage on a second property, and allow your daughter to be a party to the mortgage even though she is 19," says Andrew Montlake of broker Cobalt Capital. "You'll be governed by the size of the deposit you can put down, and to get access to the best products you would need around 25 per cent."

The average Leeds house price is £165,682, according to the Halifax, so a £42,000 deposit looms – your savings leave you £27,000 short, and you face remortgaging to tap in to your own home's equity to make it up.

Lenders will also take into account you and your wife's income – since your daughter isn't earning – and deduct the current loan on your existing property from the amount you can borrow.

This may not leave you with enough, though, so consider a buy-to-let loan, says Melanie Bien of Savills Private Finance.

"Here, rental income from the property, rather than your salary, will be used to calculate whether to lend the money."

A chunky deposit – again, at least 25 per cent – will be needed, but few lenders are keen on letting to students, so you could run into a limited choice of loan provider.

Alternatively, suggests Richard Morea at London & Country, "if you've sufficient equity in your own home, you could also remortgage to release capital and purchase the property outright".

When you eventually come to sell, be mindful of a 18 per cent capital gains tax bill but, depending on where the housing market heads, your annual CGT allowance – currently £9,600 – could easily spare you.

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