Brit Banks Unveil Unique Mortgage Plan That Turns Students Into Landlords
Some British students may soon have to factor in collecting rent and paying the mortgage on their new house.
Students often have enough trouble recovering from a hangover the night before and making it to class on time. That hasn’t deterred some British banks from taking the audacious step of trusting them with home ownership, a mortgage, and the responsibility of becoming a landlord in order to repay their loans. Have lenders across the pond suffered from a rush of blood to the head? Or is it an inspired piece of thinking which could unleash an entirely new wave of property owners?
The Guardian reports that the new “Buy for Uni” mortgage has been adopted by The Loughborough Building Society and will promise 100 percent financing for a property purchase. It sounds too good to be true. And it is. The catch is that close relatives—mom and dad or rich grandparents—will provide security if their student offspring forget to make a mortgage payment. Bath Building Society actually pioneered the program which see students (or their parents) building equity instead of paying a landlord for rented accommodation.
The criteria is that registered students in England and Wales can receive a loan for up to £300,000 (approximately $450,000) as long as the property is within 10 miles of the university where they are studying. Their immediate family are required to either put 20 percent as a down payment or put their personal house up as collateral. Interest rates range between 4.54 percent and 4.74 percent depending on what security is provided and the terms of the mortgage. After an initial three-to-five year term, the loan reverts to a more traditional type of mortgage, the idea being that place students on an early path to home ownership. Instead of having to wait until after university to apply for a loan, the graduated student will already own property and perhaps have some equity as well.
Apart from the financial aspect, owning a property should be a primer in real world responsibility, especially when it comes to the mortgage payment. It’s understood that most students won’t readily be able to find enough part time work in order to cover it, so the premise is that the student will both live in their property and rent it out, presumably to other students.
“What you want is that the rental income … covers more than the commitment, so if there is a rise in interest rates it will cover it. Or that the guarantor says—Well, yes, if interest rates did go up, or there was a void in rent, I the guarantor will pay that rent instead,” says Chief executive of the Loughborough Building Society, Gary Brebner. He adds that they have had substantial interest in the offer, but no money has yet been lent.
In Bath the scheme has been going strong for nine years, accounting for ten percent of the Bath BS’s business. The Loan-To-Value in their case is 75 percent—meaning that either through a down payment or a equity in their own home, parents are expected to chip in 25 percent.
“We do come across the occasional person who thinks that we are offering them an enormous amount of beer money, but we obviously disabuse them of that notion quickly,” Chief executive Dick Jenkins says. “Most people are pretty serious and switched on and tend to come from reasonably well-off families because we do need to take a collateral charge over mum and dad’s property to make that product work, so there has to be some equity in the parents’ property.”
And Jenkins has discovered that parental pressure for irresponsible offspring often works a lot better than a letter from the bank.
“We have found that the student-parental bond – that understanding that the parents and students have – means that if there is a payment problem we tend not to see it because it gets resolved before it gets to us. They sort it out between themselves. I can honestly say that in nine years we have never had a problem case.”
With the parents being responsible for the down payment and ultimately for the mortgage payments, should their child be unsuccessful as a landlord, some may think it a more worthwhile endeavor for the parents to take their loan in their name in the first place. The interest rates would be lower for a start. However, as a lesson in responsibility, empowerment and potentially a wonderful graduation present, the student landlord mortgage has a lot going for it. It all hinges on the borrower being able to collect rent from their fellow students on time. Should they discover that all their potential room mates have the same plans for home ownership as them — then there will be a problem.
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