Should you buy or let your kids rent when they are a student?
With university fees already at unprecedented levels in this country, and the government set to allow them to go even higher, it’s no wonder parents are looking at ways to ease the financial burden on their offspring.
And if you’re in a position to prevent your son or daughter from graduating with thousands of pounds worth of debt, most people would jump at the chance, right?
One way that parents are helping out is by investing in property for their son or daughter to live in while at university. By letting out the spare rooms to other students, you can more than cover the cost of the mortgage, while still allowing your own child to live rent-free.
It’s an appealing thought and one that, last year, 280,000 parents were considering, according to research by Direct Line for Business. Instead of forking out around £400 a month for student accommodation, you’ll actually be making money from other students… and still have an asset to show for your troubles.
But it’s important to go into this with your eyes open. Not only do you have the purchase costs to consider, with the additional 3% stamp duty for a second home, you will become a landlord and that comes with a whole raft of implications.
First of all you need to ensure that your mortgage lender knows you intend to let out the property and that this is allowed in the terms of your loan. You also need to accept that, as a landlord, you have a duty of care not only to your child but to the other students living in your property. There are many rules and regulations to abide by, maintenance costs and you’ll also need specialist landlord insurance to keep your investment safe.
You also need to consider the tax implications. Will earning rental income push you into the higher tax bracket? Be aware that, from April 2017, even if you pay the higher rate of income tax, you’ll only be able to claim a reducing level of tax relief which falls to 20% by 2020.
And what about when they’ve graduated? Would you sell up or hang on to the property? Most buy-to-let properties are seen as a 15-20-year investment, so three-five years may not be long enough to see any significant capital growth or even cover any costs, so you’ll have to weigh up the costs of owning and letting versus just renting.
Plus, when you do sell, you’ll be liable for capital gains tax at 28% if you’re a higher rate tax payer, or 18% if you’re a lower rate tax payer. Compare this to the tax payable if you sell stocks and shares (20% for higher rate tax payers and 10% for lower rate tax payers) and property might not necessarily be the best investment for you. Talk to a financial advisor before making any big decisions.
Finally, are you in a position to do this for all of your children or just one? The chances of them choosing the same university are slim, and the chances of them wanting to share a house are even slimmer, so ensure that whatever you decide can be done fairly.