If he can go into halls for the first year that would be a good thing however lots of young people live 'at home' nowadays because of lack of funds. It depends whether or not 'your' home is also 'his' home, you said it was your childhood home but presumably you and your husband sorted all that out before marriage, financially and otherwise, making it officially your husband's home.
The mum lives two hours away but in the Greater London area, two hours from one place to another is nothing. Could he not live with her some of the time and certainly during the holidays?
As your house is large he could probably have a sort of bedsit arrangement at yours which he might appreciate, being treated as a proper adult rather than a grown up child living with parent.
This really does need to be discussed openly between you, husband, ex wife and stepson. The last thing anyone would want would be the young chap to feel unwanted or pushed out by his dad's new family, at least I hope so.
I sort of understand how you feel, op, you want to feel comfortable in your own home with two small children but it could work if he lives fairly independently within your house - like having a lodger who is also a relative.
When you got together with your husband you knew he had a big son for whom he felt responsible surely? It always beats me why people get so involved with new partners who have still dependent children when there plenty of folk around with none. I know it works out OK for some but just reading threads on here about step parenting would be enough to put anyone off.
Good communication and frank discussion about finances is essential right now and there is well over a year before the boy goes to uni, a lot can change in that time.