A DROP in property prices has brought great bargains in university areas but brokers warn that a 25% deposit has become mandatory unless landlords can secure sky-high rents.

Student lets were one of the strongest performing areas in residential property last year and could bring returns of more than 10% this year if you pick the towns that produce the best rental yield.

Research by The Property Show reveals that average rental yield for the top 10 university towns is now 7.9% – outstripping the UK average of 6.4% for a three-bedroom terraced house. The worst student areas, however, yield less than 4%.

Brokers said that cherry picking areas to find the highest rental yields – the annual rental income as a proportion of the property value or mortgage – has become vital.

The number of buy-to-let mortgages on offer has plunged 85% from 3,478 to 528 since August last year, according to Moneyfacts, a financial data firm.

Deals are still offered with deposits of 20% or 15% but higher rates and fees are charged. Rental cover (the percentage of the mortgage repayments covered by the rent) was previously widely accepted at 100%. Now it is usually 120% to 130%.

One deal, from Cheltenham & Gloucester, will lend 80% of the value of the property on a two-year fixed rate of 6.84%. However, with 120% rental cover required, the investment needs to yield 8.2% to satisfy the lender’s requirements. There is also a 2% fee.

Melanie Bien at mortgage broker Savills Private Finance said: “Lending criteria has tightened across the buy-to-let sector. Compared with only a year ago, lenders need a bigger deposit, around 25%, and tighter rental cover requirements will cut many investors out of the picture.”

The stellar performance in the student buy-to-let market last year came with 14% growth in house prices in university towns in the 12 months to June last year, and soaring rents, which rose 31%. A student hall fund by Cordea Savills, a property fund manager, achieved a 20.2% return on the year for investors.

However, property prices have fallen 12% across the UK since their peak and mortgage costs are spiralling.

Agents admit that student buy-to-lets will struggle to achieve capital growth for at least the next two years because property prices are predicted to fall another 20%.

Nick Clark of The Property Show said: “With house prices falling . . . investors should look at student accommodation as a long-term investment based on high rental returns rather than capital growth. If they are planning to sell within a year or two they will lose out.”

While securing a mortgage has become difficult, there is money to be made. The trick is choosing the right city.

Cambridge and York are among the most popular search-es on propertyfinder.com, the online estate agent, but Nottingham has the best yield at 10.19%, The Property Show said.

The average price of a three-bedroom terraced house in Nottingham has dropped to £100,736 from £101,936 while the annual rent stands at £10,263, the figures show.

Durham and Manchester are next best, yielding 9.23% and 8.17% on an average house price of £120,000 and £114,602 respectively. At the other end, Crewe returns only 3.92% with house prices more level at £175,703. Buying property in Nottingham at £100,736, with the help of a tracker mortgage from Birmingham Mid-shires at a rate of 6.09% for two years and a fee of 2%, would require a deposit of £25,184.

Monthly repayments on an interest-only basis would then work out at £383, or £394 if the fee were added to the loan.

The lender requires rental cover of 125%. However, with landlords able to command rents of £10,263 a year, or £789 a month, the rent would easily meet the mortgage criteria, and make a significant profit.

Bien said: “Student buy-to-lets are a good bet as you can access a steady stream of tenants. Landlords also often insist on parental guarantees when letting to students, which should ensure the rent is paid.”

Property falls have been proportionately greater in Nottingham, which has succumbed to an oversupply of new-builds.

However, Laura Woodward of Haart, the estate agent, said: “Now that property prices have fallen by 15% this year across Nottingham, you are almost guaranteed to achieve a rental yield above 8% in prime areas.” Parents should make the most of tax breaks to maximise returns if their offspring attends university. They could consider buying a student flat on the basis of owning 99% of the property, with their student child having the remaining 1%.

They could then enter a formal profit-sharing agreement with the child so the profits go to the student, taxed at a low or For example, a higher-rate taxpayer with a £200,000 student property on a net yield of say 5%, providing an income of £10,000 a year, would save up to £3,087 on that income.

Gavin Davies, 33, a property developer in Liverpool, owns 15 buy-to-let properties, renting mostly to students. His latest acquisition was a five-bedroom terraced house bought for £142,000 last April.

“I know I got a bargain – the previous sales on the street were more in the region of £165,000,” he said. “Returns are good but I’m only seeing it in the student market at the moment.”

He bought another property last August. “If I was to rent to a family I’d get £1,200 a month but I can rent it to six individuals for £1,800 while my mortgage is £1,100,” he added.

Top tips for parents

GROWING numbers of parents fear they will be lumbered with their children’s debts for more than a decade after they finish university.

A report by Skandia, the investment house, revealed more than a third of parents expect to provide a home for their children throughout their adulthood, while two in five admit worrying that it will be their responsibility to help pay off vast debts accrued during university.

As children head off to university, we offer some advice for parents.

FOR ONCE, DEBT IS GOOD

This is the cheapest debt your children are ever likely to receive. This year, the student loan interest rate will drop from 4.8% to 3.8% from September 1. Experts caution against paying off the loan in a hurry if students are simply going to have to borrow again at higher rates in the future.

If you plan to held your child with university costs, so they won’t need the loan, it may pay for them to take it anyway and invest at current sky-high savings rates.

For example, if you invested the minimum student loan of £3,470 a year with First Save at 7.10% fixed for three years, you would earn £739 in interest against debt repayments of £395 – a £343 return.

If they need the loan and you want to avoid it vanishing in the first week of term, suggest to your child that they put the initial sum into a high-interest or Isa account so that it earns interest, and help them work out a monthly “salary” amount they should think about drawing.

Newcastle building society’s Isa pays 6.3% on a minimum deposit of £500 while HSBC pays 6.25% on a minimum deposit of £1. These both allow you to draw a monthly income.

ELIGIBLE FOR SUPPORT?

Most undergraduates will pay tuition fees of £3,070 a year – the top rate that universities can charge – to study their chosen course. However, the government has widened access to state support by raising the household income threshold for student grants. Last year, the threshold for eligibility for the lowest level of grant rose to £60,000.

There may also be means-tested bursaries and academically-based scholarships, as well as extra allowances such as London weighting or industry bursaries, depending on the subject your child is studying.

You can find information through the Student Loans Company, or contact the university or college direct, or search bursarymap.direct.gov.uk to see if they have any extra entitlements.

INSURANCE

Students own more expensive consumer goods per head than the rest of the population – and are most lax when it comes to security measures.

Forgetting to lock doors and windows and the constant stream of new faces coming in and out of halls of residence and shared houses provide perfect opportunities for thieves to strike.

The average student belongings – including DVDs, CDs, iPods, laptops and expensive brand-label clothes – are now worth £3,500, according to Swinton, the insurer.

Home contents policies provide the opportunity to purchase add-on cover for children studying away from home at university. It usually costs around £50 a year extra to cover belongings up to £5,000. However, if your child carries their laptop around, they will need extra cover. You can purchase specialist insurance from Endsleigh for £46 a year for £2,500 worth of cover.

GAP YEAR TIPS

Your child may be one of over 130,000 school-leavers taking a year off after finishing their A-levels. Those taking a gap year are likely to spend up to £5,000 travelling the world before they settle down to begin university studies, on tickets, accommodation, visas, insurance and vaccinations.

Choosing the right credit or prepaid card and bank account could save your child hundreds.

Nationwide is the only UK credit card company that does not make foreign currency charges on purchase or cash transactions. It also makes sense to check if they can supply emergency replacement cards. It may be wise to take out a credit card and add your child as an authorised user. Abbey Zero, Post Office Platinum and Thomas Cook charge no foreign exchange fees.

Prepaid cards from fairfx.com and Caxton FX don’t charge monthly usage fees. Find insurance at gocompare.com or moneysupermarket.com for as little as £28, but check the policy small print .