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Student buy to let mortgages

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By Pete Mugleston   Mortgage Advisor

Last updated: 11th October 2018

We receive hundreds of buy to let enquiries from existing and potential landlords, looking to borrow on a property being let to students and struggling to find the right mortgage.

Thankfully help is at hand as the specialists handle these mortgages on a daily basis and are well placed to give you the right advice.

Here we’ll be exploring the pros and cons of taking out a BTL student mortgage to help you decide whether it's the right investment for you. We’ll be covering:

Is a Student Buy to Let Mortgage a Good Investment for You?

For Parents

If your son or daughter is soon to fly the nest for university, investing in buy to let (BTL) student accommodation can seem an appealing prospect for many parents. Taking out a mortgage for a student buy to let can be a great way of contributing financially while your child is at uni, helping them save money on the usually extortionate cost of student rentals.

For Landlords

But it’s not just parents who are taking out mortgages for student accommodation; as it can attract potentially thousands of pounds in rent, it’s a great investment for anyone who has the initial capital required - provided you’ve done your homework. It can be a brilliant investment for professional landlords.

It can be a solid option if you want to put an inheritance or a bit of extra cash to good use; and can also a good way to help save for a pension.

So, if you’re looking to invest in buy to let student accommodation, what are the main considerations you need to think about?

What Are the Pros of Investing in a Buy to Let Student Property?

  • Student rentals tend to be very expensive, and for parents looking for a way to financially support their kids through university, it can seem a great way to contribute.
  • Whether you’re a parent or not, if you’re planning a long-term investment (i.e. if you’re planning to rent out the property to other tenants after your child has graduated and moved on), this could be a very sound option. In the long term house prices are likely to increase, whereas there is no certainty on what the property market has in store in the short-term.
  • Although there is more and more purpose-built student accommodation popping up recently, these can be very expensive, and the “traditional” student house or flat let remains the most popular accommodation choice.
  • Typically students are undemanding and not particularly fussy about the state of their property, meaning you don’t have to worry about dealing with minor niggles or investing in brand new, immaculate furniture.
  • Renting out a student buy to let to multiple tenants (either individually or as a group) offers robust income security for you as a landlord. In addition, you can also ask that each tenant has a guarantor in case one or more student falls behind on their rent, meaning you are less likely to default on your mortgage payments.

What Are the Cons of Investing in a Student Buy to Let Property?

  • If you’re looking for a short-term investment a student buy to let may be a risky option. No one knows whether house prices are going to increase, fall or stay the same in the short term, so you could end up losing money.
  • There is also downtime during holidays as well as other void periods to consider, but many landlords get around this by imposing a 12-month contract. Length of rental tenure is also limited, but this should be expected considering the nature of student lettings.
  • Finally, students are renowned for their partying lifestyles; you may have to deal with noise complaints or you may find that the tenants have damaged your property, so always consider this when calculating a deposit.
  • The property may also need a Housing Health & Safety Rating, Energy Performance Certificate, annual gas check certificate which could mean that repairs or improvements are needed.

Will Lenders Consider Me for a Student Buy to Let Mortgage?

Buy to let mortgages, whether it be for a student property, holiday home or other, work in the same way as your standard residential mortgage. A provider will loan you the money to buy a property over an agreed time period, and the loan will be secured against the property.

Although it’s the same concept, there are a few things to know about before you go about investing in student accommodation. Buy to let mortgages are perceived as considerably higher risk for lenders than residential ones are, and as such mortgage lenders expect to be compensated for taking this on.

How Much Deposit Do I Need for a Student BTL?

Typically, you will be expected to have a bigger deposit to be considered by most lenders - at least 25% or above (although a handful of specialist lenders can consider up to 85% in certain circumstances). For the same reason interest rates on BTLs tend to be higher than on residential mortgages, although of course, the larger your deposit the better interest rates you’ll receive (those with deposits of 40%+ will probably be offered the best deals). However, there are a lot of competitive deals out there if you hunt around and go to a whole of market broker.

How Much Can I Borrow on a Student BTL Mortgage?

This will come down to the rental income for the property. Generally, this is established by the valuer who assesses the property at the point of application, and will be based on other rental yields for the area in similar properties.

Typically, these calculations must meet the PRA interest coverage ratios and rent needs to cover 125% of the mortgage interest (@ 5.5%), or more for higher rate tax payers. Some lenders add increased stress testing here for higher risk lending such as HMOs and student lets, requiring say 170-180% coverage.

There are some lenders that specialise in various types of tenant and each will lend different amounts. Thankfully the experts we work with handle these applications on a daily basis so make an enquiry and make sure you get the right advice!

Covering Shortfalls Using Personal Income to Borrow More on a Student BTL

“Top-slicing” is a term used to describe this. Basically its where some lenders allow borrowers to “cover” rental shortfalls using their own income (if affordable). So if rental income will only afford a loan of 100k and you need 120k, you’d need provide you have the personal income to cover this.

How Much Rent Should I Charge on a Student BTL?

When it comes to assessing your eligibility for a student BTL mortgage, lenders will often want to know your potential rental income rather than what your salary is. For this reason you will need to be prepared and carried out the correct calculations to prove that you can afford a buy to let student mortgage. You need to be confident that your forecast rent will cover your mortgage payments comfortably (think around the 125% mark), as well as taking your other expenses into consideration.

The rent you price the rooms / property at depends entirely on the student rental market for the area. Charging £200 per week might be a good deal in London and a fortune in the midlands, for instance. It is of course recommended that you research and run these calculations before you buy!

Are Fees Higher for a Student Buy to Let?

Finally, any setup fees to cover arrangement, bookings and valuations, can be higher on buy to lets than residential, so you’ll need more cash upfront for this type of mortgage. Initial fees can be as high as 3% of the value of your loan, so bear this in mind.

How Does Bad Credit Affect Buying a Student BTL?

As with any mortgage application, a poor credit history can be a big no-no for lenders. When it comes to student BTLs, and BTLs in general, this can be even more of an issue.

This is because if you fall into financial difficulty, it’s likely you’ll prioritise your main residence rather than the second property, and will therefore be more likely to default on payments for the second.

However, some lenders are flexible, and may offer decent rates to those who have had a history of bad credit. They may require you to have a larger deposit together to instil more confidence, but a lot of it comes down to how recent and how severe the bad credit issues have occurred.

Can a Student BTL Be a Joint Mortgage?

While it is possible for parents, for example, to help their student offspring by taking out a join mortgage for a BTL, it is not as common these days since the additional 3% stamp duty on second homes came into effect. A more financially beneficial arrangement may be to gift your child the cash, or for parents to take out a mortgage and act as the guarantor(s).

Another option is a ‘joint mortgage, sole title’ arrangement, where parents are named on the mortgage and are liable with their child for repayments. In this situation, parents don’t have ownership rights on the property, so they won’t be liable for additional stamp study or capital gains tax issues they would be if they were joint owners.

How Many Students Can Occupy a BTL?

As covered, all BTLs accommodating five or more tenants must have an HMO license. While there is no limit as to how many students can occupy a BTL, there is additional licensing to consider if this is this case. Before granting any additional licensing, the local authoritative body must be satisfied that:

  • The property is suitable for a certain maximum number of people to live there.
  • The person holding the licence and the person managing the HMO are fit to maintain the property and ensure it is managed correctly.

Can I Let a Student BTL to a Family Member?

Historically, lenders have been dubious about allowing BTL investors let to family members. Most mortgage providers require that you charge your tenants rent at a rate of 125% or higher, so letting to a family member at a reduced (or free) price is legally quite an “iffy” move (unless of course, you charge the remaining tenants a considerably higher rate to cover the cost of the related tenant - but then there are other tax implications to consider).

However, there are a few lenders out there that have launched new “family buy-to-let” schemes, which allow borrowers to legitimately let the property to their children, or other close family members, at a considerably lower rate.

Where Is the Best Place to Buy a Student Property in the UK?

As home to some of the most popular universities in the world, student accommodation continues to be well sought-after in the UK, despite any initial concerns raised after the result of Brexit.

The high market demand provides a compelling case for those looking to invest in student buy to let houses or flats, and not just within high capital growth areas such as London, Brighton, Southampton, or other typically fruitious areas of the South East.

Cities such as Birmingham, Leeds, Manchester, Nottingham and Liverpool have all seen property values rise over the past couple of years, assisted heavily by landlords in the South selling up unprofitable BTL’s and moving their capital up north. At the end of 2017, Bristol, Leeds and Nottingham were listed at the top of the charts for best cities to invest in student buy to let properties.

Of course, as with any buy to let investment it is important to understand your market and the area you’re looking to invest in. Many students like to live in towns or cities which are dominated by other students so they are in close vicinity of their friends.

In some areas it is the “cool thing” to be close to campus, whereas in others it can be more commonplace to live closer to the city centre - so do some research into what people are seeking; and weigh up property prices in the area to assess where the most financially beneficial location is to invest.

What are the Legal Requirements of Owning a Student BTL?

While you weigh up the pros and cons of taking out a buy to let student mortgage, you should also consider the additional accreditations you will need. A property that is let to five or more unrelated tenants (so almost every student house) will be classed as a House in Multiple Occupation (HMO), in which case you will need to be licensed by your local authority. This also applies is three or more storeys high.

An HMO license is valid for a maximum of five years, and initial costs will vary on location, how long you’re licensing for, and the size of the property. As an example, a new application 1-year license for a student property in Oxford will set you back £420, and £315 for each recurrent 5-year renewal (provided all eligibility criteria are met), so consider these additional costs.

Talk to a Student Buy to Let Expert Today

If you like anything in this article or you’d like to know more, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 11th October 2018
OnlineMortgageAdvisor 2018 ©

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The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

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