Can I Get A Mortgage for Purpose-Built Student Property Investments?
The short answer is maybe, as it depends on the type of student property investment that you are considering … but don’t despair, with the help of an independent financial advisor we found ways of raising finance at less than 3% fixed interest, even though mortgage lenders were not prepared to lend…
With standard Buy To Let purchases of UK property, mortgages are generally available up to around 80% to 85% of valuation and in the main, the lender fees for granting such mortgages are quite high. One of the best points in favour of these sort of mortgages is that low, long term fixed rates are available which, when combined with some sort of rental guarantee (insurance) assure the landlord of a fixed income.
For example, the typical income generated from a buy to let investment is around the 6% level and a long term buy to let mortgage might be at say 3%. The figures might work out something like this :
Purchase price £100,000,
+ Stamp Duty £3,000, Legal Fees £1,000, Mortgage Fees £2,000
So based on a mortgage of 85% of the price (£85,000) this means that the buyer has to come up with the other £15,000 in cash, (£18,000 if you include the legal and mortgage fees, not to mention the cost of any decoration, buildings insurance and furnishings).
The rental income would be (say) £500 per month (£6,000 per year or 6% of the purchase price excluding fees) and the mortgage would be about £212 per month (3% of £85,000 divided by twelve to get the monthly payment) meaning the the landlord is receiving a NET return of ( £288 per month or £3,456 per year, This (basically) is a net return of about 3.5% (net income divided by purchase price). Not really that great BUT over the long term the buyer can reasonably expect some capital growth as property prices have been shown to increase substantially over the long term and rental income increases (roughly) in line with inflation.
Most of the people that approach us showing interest in these type of buy to let investments (student accommodation investments) pay cash. With proven higher income returns than traditional buy to let property, lower cost of entry and fully managed properties, the advantages are obvious. Money that has been sitting in a fixed income bond or a building society savings account has been put to much better use with the purchase of student property accommodation and this indeed is why many of our clients come to us: they are people that are looking to obtain a greater return on their nest egg.
There are however circumstances where it is highly likely that our clients will seek advice on how to raise capital for purchase. These clients generally fall into two categories, what we call the Portfolio Investor and the Retired Couple Needing More Income. I will describe how each of these is able to raise finance for purchase, regardless of whether their chosen property investment is ‘mortgage-able’ or not but first, a quick look at the reasons why the high street banks and building societies are reluctant to develop mortgage products for some types of student properties.
Consider the types of student property that are available for investment. First there are HMOs, this is ‘Homes with Multiple Occupancy’. Here a landlord might buy (say) a large Victorian house and then convert it into separate bedsits or rooms (even self contained apartments) with perhaps a shared (common) kitchen, dining area, reception area and lounge. Because the landlord owns the whole building, mortgage lenders will often consider this sort of property for a mortgage loan, so yes for HMO properties, mortgages are available (depending on factors such as the number of occupants) if you know where to look.
A qualified IFA (independent financial advisor regulated by the Financial Conduct Authority – FCA) or licensed mortgage broker will generally have some experience of this type of purchase and will be able to guide you to the right lender and at the best rate.
In the case of Student Property where you are buying a leasehold unit in conjunction with many other investors (about half of whom are private investors, half are individuals) mortgage lenders take a different view altogether and for various reasons, some based on fact, some on tradition, they simply wont lend on this type of PBSA, on the basis that they have inadequate security should you default on the mortgage payments.
In this case, it may be possible to raise a loan from your own bank and there are indeed a small number of commercial lenders (and high street banks) that will consider a making a loan but you will need to produce a business plan and (often) put something up as security (for example the loan may be secured on your main residence). Even then, the loan will normally be at a much higher rate than a mortgage loan, so any rental income will likely be swallowed up just to make the loan repayments.
With this commercial finance option, eventually of course, the loan will be repaid and then the investor will start to receive an income and of course, profit from capital growth should they decide to sell the property. You can probably guess that the typical clients who go down this route (commercial finance) are generally Portfolio Investors : they are buying multiple units investing for the long term capital growth more than for immediate income.
So what happens when you get an retired couple who are looking to increase their income but without wanting to go down the route of arranging an Equity Release mortgage?
Here is a recent case that explains how one couple were able to do this:
The purchase price of the student property investment was just under £60,000. There is no stamp duty to pay on PBSA purchases under £85,000. There were no legal fees or other costs whatsoever. The couple, both in their mid sixties had a small pension income and were interested primarily in increasing their net income, without jeopardising their children´s main inheritance (the family home), They estimated that their home had a rough valuation of £320,000.
Our financial advisor obtained for them an interest only mortgage secured on their home for the full £60,000 at a rate of under 3% fixed for ten years. The student property investment gave them a net fixed return of 9% for 10 years, guaranteed. So each year they have to face mortgage payments totaling £1,800 and they receive a rental income of about £5,400 per year. The clients have therefore increased their income by £3,600 per year (about £300 per month) and in terms of equity (the ratio of total mortgage balance owed to total property value) they are no worse off.
Whichever way you look at, being able to increase your income, without cost and without risk is not a bad way to do business.
Most interestingly, the couple mentioned are now considering increasing their mortgage in order to purchase another unit and so generate even more net income. Perhaps this fact has major ramifications as to the huge market in the UK for Equity Release mortgage products, not to mention a shift in thinking as to how pensioners can increase their income with little effort. Time will tell.