Many parents consider giving their children housing security when attending university.
From the lender’s perspective of risk, the maximum lending on such a property would be in the region of 80%-85%.
Lenders can be put off by the phrase ‘multiple occupancy’ because of the poor connotations it carries. The lender will be looking for the valuer to confirm a standard property’ for example, a property with one bathroom. This is important to the lender to confirm that any potential sale of the property will not be restricted.
It will be vital to review with the clients what options are available to increase the deposit and lower the LTV. Will the main residence be taken into account? Does the main residence have a small current mortgage or is it mortgage free? If so the clients will have options regarding remortgaging to increase the deposit.
Potentially enough equity may be available in the main residence to require a mortgage LTV of less than 50% on the property to be purchased. If this is the case the lender will probably take a flexible view of the rate on any required mortgage on the property for the daughter. For clients using their main residence to raise a deposit, there are many excellent remortgage deals on the market.
The case changes when the only deposit available is 15% and it therefore becomes a higher LTV case. This then becomes a buy-to-let proposition and the case hinges on the anticipated rental income. The students would be treated as tenants and an assured shorthold tenancy would be required. The valuer would be required to confirm the anticipated rental valuation and ensure it meets the lender’s requirements. However each lender will have its own policy on buy to let.
The scenario raises as many questions regarding the property as that of the applicant’s financial position. As with all mortgages the obvious questions will be with the parents’ current mortgage and financial commitments, giving consideration to income from the rental, their combined salary and investments together with an overview of outgoings. There may also be adverse credit issues to be considered.
The intermediary would need to ascertain if the property is structured as a single dwelling where the occupants will live as one family unit. A maisonette which has locks on the doors would indicate very different living patterns ‘ the survey will be key as it will give clarity to the owners’ and occupants’ intentions. If the property were multi-tenancy then the choice of lenders would be very restricted; with even more complications if more than 4 bedrooms were let.
Regarding the mortgage it would be interesting to identify whether the parents would consider placing the daughter on the mortgage as this would give many lenders reassurance that the property was likely to be better looked after. Given that the daughter is likely to get a good job when she leaves university there is a chance that she could take over the mortgage.
The other aspect which will give the lender comfort is the presence of a short hold tenancy agreement placing all occupants under one agreement. If there were no agreements then the lender could become burdened with a sitting tenant. This would render a sale almost impossible if repossession were required, or at least result in a sizeable down valuation of the property.
The applicant should take out commercial insurance and may need to seek local authority approval if there are more than four bedrooms. If the property is large, fire officers may have to approve means of escape, lighting and other issues.
In these circumstances lenders typically would consider a maximum loan of 85% LTV to your clients. The design and pricing of products would generally be the same as their standard buy-to-let deals.
There are several lenders that would consider student buy to lets including Platform, Capital Home Loans, GMAC and Britannic Money. This case would also be considered by Chelsea Building Society, Mortgage Express, Northern Rock, Paragon and Woolwich.
Most lenders need to establish the credit worthiness of the parents and might well ask whether they have an existing residential mortgage, whether they have a clean credit history and whether they can prove their income. Some lenders would also check if they have any other buy-to-let properties.
Understandably, lenders will also have a keen interest in the type of property being purchased. Typical underwriting questions might include:
• How many bedrooms are there?
• Will all the students be on one assured shorthold tenancy?
• Has the property been let previously?
In terms of lender restrictions ‘ locks on bedroom doors are generally frowned upon and more than one kitchen can cause a problem, particularly if the valuer reports that rooms are effectively bedsits (with, for example, cooking facilities or electricity keys in each room). Lenders might, in these circumstances, suggest a full retention until the property has been brought back to a ‘single dwelling’.
Lenders will invariably require confirmation of the anticipated rental income and make sure that this fits their affordability calculations.
A typical rent calculation to consider is 130% of the rental income at a lender’s standard variable rate. Your client should ideally select a property where 85% of the purchase price is covered by this rental calculation.