Rather than Funding their Fees?
Supporting your children though university can be costly. As parents, you may decide to pay their tuition fees, their living costs, or both. There are plenty of finance options for students, some of which may never have to be repaid. Here we look at how parents could invest in a student house rather than funding tuition fees.
This article does not constitute advice.
Professional advice should be taken prior to acting on any part of it.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Funding tuition fees
The cost of university is typically £9k per year, so that is £27k for starters. Let’s assume a £10k per year cost of living, as is likely in a city like London, Bristol or Oxford. That, over a three year typical degree course, means an extra £30k.
It is quite possible therefore to need roughly £60k to invest in your child’s higher education.
That is assuming they do just a three year course, and taking account for just one child!
Student loans – may never need to be paid back
These days students have access to considerable finance when it comes to their studies. Student loans can be taken to cover the tuition fees and living costs; how much depends on the location and parent earnings.
Some students will never have to pay back their loans though. For example, if the graduate’s earnings don’t reach £21,000 then after 30 years the loan will be written off in it’s entirety and they will have paid only the minimal interest payments, over the 30 years.
In fact, a mid-range earner will end up having a harder time, financially, paying back their student loan than a high earner, see table below showing a broad view of how student loans work, at present.
Could your £60k be better invested investing in a buy-to-let student house
Assuming you need £60k, per child, to support them though university, the question is, could this money be better invested?
Most buy-to-let mortgages allow funding up to 75 percent of the property value.
Therefore, if you invested £60k as the deposit, you could invest in a property up to £240,000.
This would exclude areas such as London, however for many other popular university towns it is entirely possible to find properties for this value, and even lower.
Opt for a property with preferably 3 or 4 bedrooms and by charging market rent to other students it is highly likely you can see a good monthly return.
Example – £100k mortgage on a 1.69 Tracker, Interest Only, could cost as little as £150 per month. £250 per month, from 3 students, means £750 income, so £7,200 per year in profit.
Obviously, there are up-front costs to buying a house and typically a student house requires more repair and maintenance than the average buy-to-let.
Also, an interest-only mortgage may not be advisable, or available.
However, by working through calculations such as these, will show you comparisons for how best to spend your money in relation to supporting your child in higher education.
Ownership, Tax and Stamp Duty
STAMP DUTY
If you own a home already, then buying a second property does leave you open to the added Stamp Duty Land Tax (SDLT).
INCOME TAX
Similarly, the way in which rental income is to be taxed in the future makes it a less attractive proposition for some investors. Soon less tax relief on mortgage can be claimed against the rental income, meaning the tax for a property investor is likely to be higher. Especially, if you pay higher rate tax yourself, then this could just eat away at returns.
A potential solution could be to buy the property in your child’s name. This avoids the SDLT issue and with little to no income they would likely keep their income under the personal allowance.
CAPITAL GAINS TAX
Also, it is important to consider Capital Gains Tax (CGT) as this could arise on any future sale. The annual allowance and other exemptions may reduce the liability. However, should the property be purchased in your child’s name, having lived in the property, they would be able to claim for Private Residence Relief (PRR), reducing CGT to zero.
OTHER CONSIDERATIONS
The main hurdle here, is that for buy-to-let mortgages, it is typical for the lender to want to see source of other income. As a student this could pose an issue.
Also, ownership in the child’s name gives them responsibility and control. If they perhaps wanted to stay in the house after their studies, but you wanted to release the equity to regain your £60k investment, these sorts of things need to be ironed out in advance.
In summary though, giving your child a property, that gives them an income stream and the potential for capital growth, is worth exploring.
Not only could this save money through the years of education but could also give them their first stepping stone onto the property ladder; something which most young adults are struggling with.
Need help with your rental property. Speak to Chris
We can help discuss your options regarding a buy-to-let mortgage as an investment option on a student house. Please contact Chris for a free, no obligation appraisal.
Tel: 01403 780 770