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Student house or ISA, what’s better for your child?

Whether your child’s at university or nervously waiting for their A-level results, you may have toyed with the idea of buying a student house in an attempt to reduce that student debt.

But with stricter mortgage lending requirements after the financial crisis and recent changes to the buy-to-market, would you be better off buying a student property for your child or investing in an ISA?

The good news is that you’re not alone in wanting to help your child on the property ladder; over 30% of first-time buyers get help from their parents.

Set to loan £6.5 billion in 2017, the Bank of Mum and Dad is on course to be the ninth biggest mortgage lender this year  – even larger than Clydesdale Bank.

Owning a second home

If you do want to help your child on the property ladder, there are a few paths you can take. Firstly, you could buy the property yourself, although this probably means a larger stamp duty bill due to the second home surcharge – as well as enough money for the deposit in the first place.

If you’re happy to foot the extra 3% stamp duty bill, you’ll have two mortgage options; residential and buy-to-let.

With a residential mortgage you’ll have to prove you can afford the payments on top of any existing mortgages you have. There are also strict rules around buy-to-let lending; you’ll need a deposit of at least 25% and your rent will need to cover mortgage repayments by around 125%. Some lenders aren’t keen on student renters, either.   

When you come to sell the property, you could be liable to pay a big capital gains tax bill – 18% for a basic rate taxpayer and 28% for those on the higher band.

Student mortgage

What about if you don’t want to own the property yourself? Fresh-faced from school, your son or daughter probably doesn’t have enough for a deposit, and the late-night shifts at the student union are unlikely to cover the regular mortgage repayments.

If your child is over 18, the second option could be a ‘Buy for Uni’ mortgage – but you’ll need  to stump up the collateral.

Building societies will loan students up to 100% of the price of a property worth up to £300,000. The buyer (your child) would then become a landlord and pay off the mortgage with the other student tenant’s rent.

Whilst this may seem like a good solution, it’s risky.  

As a guarantor, you’ll have to put 20% of the property value in a savings account or provide security through the equity in your existing property. That’s the equivalent of £60,000 if your child wants to buy a £300,000 house.

If things go wrong you could kiss goodbye to your savings or even be forced to sell your home to pay off the loan.

The interest rates on these loans are also higher than you might see on a usual residential mortgage, with those from the Loughborough Building Society varying between 4.54-4.74%.

You need to ensure that your child will be able to afford a hike in interest rates if the Bank of England decides to raise the base rate in the future.

Risks of being a landlord

There are also practical risks of your child becoming a landlord at the ripe age of 18. They’ll have to juggle the responsibility of student life with finding tenants and managing the income – what if their friend moved in and fell behind on their rent?

Whether it’s the washing machine breaking, a case of mould, or damage from a party, your child will need to manage and pay for all issues when they crop up.  

When they leave university there’s an option to adjust the terms of the loan with the lender, but saddled with a mountain of student debt and a mortgage, what if your child can’t keep up with the payments?  

If you decide to sell the property after three years, there’s the chance your home may have fallen in value. Three years is classified as a medium-term investment in financial circles, and an appropriate strategy would be to take on some risk to target higher returns – but not too much.

Taking on up to £300,000 of debt to invest in one asset is risky, not many financial advisers would tell an investor to put that much money in just one company.  

Save this money in an ISA

Whilst you may want to help your child onto the property ladder sooner rather than later, there are merits to waiting until your child has settled into a full-time job and saved some money of their own.

They need to be financially ready and mature enough to handle a property and the responsibility it brings – especially if they are going to be a landlord.

If you keep this money in cash, however, inflation will eat into its purchasing power over time.

Instead, savvy savers are looking to the market to protect their money with inflation-beating returns.  

Understanding your investor profile is one of the first steps to achieving your financial goals, and involves taking the time to know what you’re investing for and when you’ll want your money.

Five years is considered a medium-term investment, so you’ll want to take on some risk in the hope that you’ll be rewarded with more handsome returns later on. This will encourage you to ride out any short-term volatility, and take you one step closer to your financial goals.

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