No deposit mortgages for students? Vernon Building Society becomes the latest lender to offer 100% loans for students to become landlords
- Vernon BS becomes third lender to offer a 'buy-to-uni' mortgage
- New deal lets parents back a 100% mortgage with their own property
- The deal is the cheapest of its type at 4.7% up to 100% loan-to-value
Mortgage lending without a deposit has long been viewed as one of the hallmarks of the financial crash and exactly the type of reckless lending that led to the recession in the first place.
It's surprising then that the deals advertising themselves as '100 per cent' mortgages today seem to be targeted towards some of the most risky borrowers out there - first-time buyers and more recently, students.
Vernon Building Society has become the latest lender to offer what it calls a 100 per cent mortgage - a loan with no deposit to act as a buffer against negative equity - to students.
Vernon BS joins Bath and Loughborough in offering a student buy-to-let guarantor mortgage
Not only that, but the deal is aimed at students who wish to become landlords to their chums at university.
The mutual will lend students 100 per cent of the value of the property up to a maximum of £300,000 on a buy-to-let mortgage.
Said student then becomes a landlord on the property while living there, and rents out spare rooms to other students to cover the mortgage payments.
But there's a catch - in order to qualify applicants must have financial support from a parent - who will have to allow the lender to use their existing home, or a portion of their home, as security for their child's mortgage.
On top of this, they'll need to cover the shortfall in the monthly mortgage payments if their son or daughter fails to attract enough tenants.
So it's not so risky after all - But is it a good deal? We take a look how it works.
What's on offer?
The deal enables parents to help their children buy a home without having to directly fund a deposit by providing supporting security equivalent to 20 per cent of the property's value with a charge on their own property.
Parents can also do this with a cash deposit if they so choose, which will earn a variable interest of 1 per cent.
Vernon can do this because of the guarantee element - if the student fails to pay the mortgage, the lender can require parents to pay up instead.
Similarly, if the property was to be sold for less than was borrowed, the lender would look to recover that shortfall using the cash deposited by parents or by raising finance against their home.
Importantly however, the borrower owns the property in their sole name and the parent is not on the title deeds. This mean the stamp duty exemption for first-time buyers remains in place.
This isn't an entirely new idea. Many lenders are now offering mortgage products that allow first-time buyers to get onto the property ladder with the help of their family. These are known as guarantor mortgages.
They include deals whereby parents or close family members use either their home or savings as a security against the child's mortgage.
Vernon's new deal is a mix between a guarantor mortgage and a buy-to-let mortgage, essentially allowing students to own a home and become a landlord to their fellow students without putting up any money themselves.
Vernon Building Society's Tom Gurrie said: 'Many parents want to help their children onto the ladder and ease the costs of putting them through university, and the buy for uni mortgage lets them do both.
'Instead of paying rent to a student landlord, the student becomes the landlord, receiving rental income that helps cover their mortgage repayments, while having a secure home for the duration of their degree course, or beyond.'
The student landlord can stay in the home on a residential mortgage once they have graduated
How does it compare?
The deal is available at 4.7 per cent interest up to 100 per cent of the property's value - but remember that the parent has to 'back' the mortgage with at least 20 per cent of their own equity.
The deal also comes with a £899 fee if the parents are providing 20 per cent security and £499 if they are providing over 20 per cent.
Crucially, the five-year discounted rate comes with no early repayment charges, so it won't cost anything if the son or daughter decides to sell up once they have finished their studies, or even partway through, assuming the home hasn't lost value in that time.
On graduation the mortgage can either transfer to a residential mortgage if the student wants to remain in the property as their home, convert to a full buy-to-let mortgage if they want to let it and move elsewhere, or be sold and the mortgage repaid.
Currently, both Bath and Loughborough Building Societies offer similar, but slightly more expensive, deals.
Loughborough offers a five-year discount up to 100 per cent loan-to-value at 4.84 per cent with a £999 fee, while Bath offers two, three, four and five-year deals at 4.89 per cent with an overall £799 fee.
Bath's maximum loan like Vernon's is £300,000, while Loughborough's is £400,000.
Loughborough's deal carries no early repayment charges, but Bath's does to the tune of 3 per cent in years one to four, then dropping to 0 per cent in year five, with a £100 charge for closing the account.
Overall there's little to separate these deals, but Vernon's is the most competitive by a slight margin.
Both Vernon and Loughborough's deals are available to UK residents over 18 and in higher education with at least one year remaining on your course.
Bath's offer is available only in England and Wales and the student must have at least two years left at university.
The deal has no early repayment charges so it won't cost anything to sell upon graduation
What's the catch?
The parents of the prospective student landlord will have to be fairly well-off to qualify.
And this doesn't just mean they'll have to have a big house to back up the loan - they will need to have plenty of disposable income to be able to pass the lender's affordability tests.
The mortgage is underwritten based on the potential rental income from up to three spare rooms in the property - which means the parents have to pick up any shortfall if required.
This means that the parents of the landlord will need to be earning enough to be able to cover the shortfall for up to three rooms' worth of rent on top of their existing outgoings in case tenants aren't found or pull out.
To make sure this is the case, Vernon will put both the student and the parents through a 'blended' affordability test to make sure they can pay.
Vernon Building Society's Alexander Deakin said: 'When we look at affordability on buy for uni, we take a blended approach, starting with the student, who will own the property.
'We consider any income, from part-time work for example, and the projected rental income on the property as well as outgoings, such as utilities and other costs.
'We also look at, and validate, the parental income. We are interested in the parents' disposable income to support the mortgage on a blended basis alongside the student.
'The maximum level of borrowing is worked out on the borrowers' joint affordability, not on them each being able to afford the entire mortgage on their own. As with any joint mortgage, all borrowers are jointly liable and responsible for the whole amount.
'Buy for uni meets a specific need in the market and it can suit lots of families, but there are others that it won't be right for, which is where good advice comes in.'