Concessionary purchase mortgages – How do they work?
If you are offered a concessionary mortgage from a mortgage advisor, it is a great way to get on the property ladder.
How does a concessionary mortgage work? And how much deposit is required to obtain concessionary purchases?
This guide will tell you everything you need to know so you can purchase a house for less than the market value.
What are concessionary purchase mortgages? How do they work?
Concessionary purchases are a way to purchase a house at a lower price than the market value. This is also called a “below market value” purchase (BMV). Concessionary mortgages, or BMV mortgages, are mortgages that are used to purchase properties below market value. This type of concessionary purchase is often made between family members, but not always.
We will be discussing below the different types of concessionary loans.
- Parental/Family
- Landlord
- Employers
- Developers
Mortgages for parents and families that are concessionary
Many parents recognize the difficulties and expenses that their children face in today’s property market and want to help. Family Concessionary Purchase allows them this.
Concessionary purchase mortgages for landlords
A landlord might want to offer a discount to his tenants, just like his parents. A landlord may want to avoid the hassle and cost of selling the property on an open market. They might also wish to recognize the value in the rent they have paid, particularly if they are selling the property to long-term tenants.
Lenders may also have caveats to landlord concessionary mortgages.
- A discount cannot be lower than a percentage (usually 5-10%)
- Lenders may require that borrowers contribute at least 5% to their own cash.
- Some lenders require that the tenant has lived in the property for at least one year before a BMV Mortgage can be approved.
- A few landlord discount mortgage lenders will provide a concessionary buy-to-let mortgage for those who want to rent out their property to someone else.
Mortgage applications that are below market value can be a bit more complicated. Some lenders won’t be happy to get involved.
While some lenders will accept the discount as a deposit, others may require that the buyer also deposit their own money. Some lenders will require that the buyer deposit their own money in addition to the discount.
Employers offer property concessions
An employer can also sell a property to employees at a lower price than the market. To avoid disputes over ownership, the seller must acknowledge that any discount given is a gift without conditions. This can be done by signing a waiver of rights.
Developer discounts on purchases
Developers may also offer buyers a discount on the purchase price of a property, more commonly called a developer discount. This is especially true for new constructions, where it can be difficult to find a lender willing to provide a mortgage.
Lenders will be interested in the reason why the developer is willing to sell at a discounted price. A lender might not be concerned about the reason the developer is willing to sell at a discount. However, this may prove problematic later on if they have to repossess the home and sell it.
Concessionary Purchase Discounts on the Open Market
Sellers on the open market can also offer buyers discounts. This is a rare situation and it may be more difficult to find a lender willing to lend in such cases. They will need to understand why the discount is being offered.
If the seller offers a discount due to structural problems, dampness, or other issues, the lender may ask for a higher deposit in order to offset this risk.
How to obtain a concessionary purchase loan
Although the process is similar to a standard mortgage application it’s not much different. However, the lender will be more concerned with the property’s actual market value. They will want to know the reason you’re buying it below its market value. Are you buying it from a relative or at a discount price?
You can learn more about the mortgage application and the documents that you will need in our dedicated guide.
You’ll want to get your mortgage application approved. However, it is important to obtain professional advice before you move forward. Mortgage brokers are experts in concessionary purchases and know which lenders have the best interest rates.
If you are looking to buy below market value, it is a good idea to get in touch with us.
What factors influence eligibility?
These factors can impact your eligibility for concessionary purchases:
- Property type listed buildings are riskier for lenders to mortgage because they can be harder to sell in the event of repossession.
- Income Lenders will require proof of income to ensure that they are confident you can afford your mortgage payments.
- Mortgage term – The standard term for a mortgage is 25 years. However, some lenders won’t lend a mortgage to seniors. A borrower who wants a mortgage for a shorter time period will need to show affordability.
- Minimum deposit: Putting down as much as you can help you to get the best rates
- A credit history specialist lender may be required if you have any type of bad credit.
What should I do to apply for a concessionary buy?
These steps will help you during and before applying for a Concessionary Mortgage.
Make sure you and your seller are familiar with below-market-value mortgages
Concessionary mortgages require the seller to reduce the sale price of their property to allow the buyer to be able to afford it without having to save a deposit. This is a significant financial gift that should not be taken lightly. Both parties must understand the terms and conditions before proceeding.
Check your credit files
It is important to know your credit history in order to be eligible for a mortgage. Also, understand the criteria lenders will use when evaluating your application.
It is possible that your credit score might differ between credit firms. Each credit company uses different criteria to determine a person’s credit score. This is why it’s important to have a copy of each report from major credit firms, including:
- Experian
- checkmyfile
- Credit Monitor (previously called Credit)
Our advisors can assist you in this area and can offer you a free trial with any of the listed credit companies. To get your credit report, please visit our credit checking page.
Size of deposit
It is possible to obtain a mortgage for 100% of your purchase price, provided that the LTV (based on market value) is acceptable security for the lender. This would normally need to be equal to the lender’s minimum deposit requirement of 85-90%.
Concessionary purchases are great because the difference in property value and purchase price is recognized as your “deposit”. Providers don’t require that you deposit any money.
This example shows how the sale price can affect the amount of the loan needed. The loan amount required will be lower if the property’s market value is reduced.
Your parents own a property valued at £200,000, but they decide to let it go to you at a lower price of £170,000.
Lender A may refuse to lend because they won’t accept any discount or deposit.
Lender B recognizes the difference between the sale price and market value (15%). This means that buyers can get an 85% mortgage to the full £170,000.
Lender C may accept the discount, but require that the buyer still have personal cash equal to 10% of the discount.
How to find the best concessionary purchase mortgage lender
A broker who has access to all concessionary lenders in the UK is the best way to select a lender. We have helped many homeowners obtain mortgages for properties below their market value over the years.
Concessionary mortgage rates are generally the same as standard purchases when comparing them. Mortgage rates can vary depending on many factors, including the type of property, length of your mortgage term and credit history.
A broker who is knowledgeable about your situation will be able to find the best deal for you from all concessionary mortgage lenders.
Before you apply for any mortgage concessionary purchase, your adviser should make sure that everything is clear and get your agreement.
Our brokers are experts who can help you determine how much deposit you will need for each Concessionary Mortgage provider. They also connect you to the best lender if you choose to proceed.
What are the limitations to a concessionary mortgage?
A mortgage below the market value can be a cheaper way to get on the property ladder, but it is important to point out the limitations of this product. These include…
The discount must not be a loan
Sometimes, a concessionary mortgage is referred to as a “gifted equity deposit mortgage” because it must be given as an absolute gift and not as a loan or share in the property. There should also be no conditions attached.
This is a significant financial gift for the seller of the house. Your mortgage lender may request that you both seek independent financial advice before proceeding.
If you are looking to share the property, rather than having it transferred to a new owner, it may be worth remembering that it is possible to transfer a mortgage to have the equity move from one party to the other.
Lenders may not allow your parents to stay in the property after it is sold
If parents are buying the property and intend to keep living there after the sale to their child, most lenders will prohibit them from doing so. This is usually because of concerns about rights and residence if the property is ever repossessed.
This is especially true for concessionary purchases in which there was also a gift or equity that could be challenged in the future without the right legal protection.
However, lenders are willing to let the seller stay in the property if they sign a waiver and the buyer is able to afford the mortgage.
Can I get a mortgage concessionary with bad credit?
It is possible to obtain a concessionary mortgage for a property, regardless of your credit history. The good news is that even if you have bad credit, there are lenders who will lend mortgages to those with good credit.
Some credit types, such as repossession and bankruptcy are considered more severe than others, while others, including late payment and a low score, can be accepted on a mortgage application.
Each lender has its own terms and conditions. They use different criteria to determine if someone is able to repay their mortgage. One lender might reject your application, but another lender might approve it.
Our specialist advisors are specialists in finding concessionary mortgages for people who have bad credit. They will be able to help you find a suitable mortgage deal that suits your needs.
Do I need to pay stamp duty
If you’re a first-time buyer, and you have not owned a freehold, or a leasehold interest, in residential properties in the UK, or elsewhere, you will be exempted from stamp duty as long as you purchase a property that is less than £500,000.
Concessionary purchase stamp duty can be a great option for those who are not first-time buyers. It is calculated on the property’s sale price and not its market value.
If a property’s market value is £200,000, but the property is sold to you at £170,000, then the stamp duty for a concessionary purchase would apply.
Stamp Duty is charged at 2.5% for properties with a value between £125,001 & £250,000. This would mean that you would have to pay £3,400 in Stamp duty.
A concessionary purchase can not only save money on the selling price but can also lower the cost of stamp duties.