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Mortgaging a Property Purchased at Under Market Value

Discover the optimal ways to apply for a mortgage, even if you've been stung with a poor property valuation or know the residence in question isn't yet worth the market value you'd like to borrow.

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin2023-05-09
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Mortgaging a Property Purchased at Under Market Value

If you have seen a property marketed for a fast sale at lower than market value, the chances are you will be keen to snap it up!

However, we have lots of enquiries from people looking to buy a property from a relative, or looking to pick up a property being sold to repay debts, and needing to know how the process works, and if a mortgage is likely to be any different from usual.

Is It Difficult to Get a Mortgage for a House Purchase at Under Market Value?

Not particularly, no - although the local estate agents may ask for more information about the pricing.

For example, suppose you're buying a property from a family member. In that case, the lender will need to analyse the circumstances and assess true market value before making an offer to lend.

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What is a Concessionary House Purchase?

This term is used to describe the sale of a property at under-market value between family members. Some lenders might even consider the difference between the transaction value and the market value in lieu of a deposit.

There are a few plus points, and criteria to look out for:

  • If the discount is considered a deposit, you could get a 100% mortgage with no deposit required.
  • Usually, this option is only available to sales between immediate family members.
  • Requirements can be complex, and so experienced mortgage brokers are vital.

Why Do People Have the Option of Buying a Home Under Market Value?

In many cases, there might be a misconception that selling a property for less than it is worth is breaking the law, or is unethical - but there is no reason you cannot choose to do this.

Common examples include:

  • One family member selling a property to another - often a parent is selling to a child to help them get onto the property ladder, while also saving estate agents fees.
  • Seller undervaluing their home to achieve a faster sale - sometimes this occurs after a divorce, or the beneficiary of a will may need to sell the inherited property to settle the tax obligations arising from their inheritance.
  • Needing to liquidate property assets quickly to cover debts - homeowners in financial difficulty may choose to sell their home to repay the debt and avoid a repossession scenario.
  • Auction properties - often auctions have a reserve price, which is the minimum acceptable. That minimum can often be below market value. Some auction properties are repossessions, and therefore being sold on behalf of a claimant bank or at an original purchase price to prospective buyers.

Understanding Concessionary Mortgages

Concessionary mortgages let you buy a home at a price below its market value. The seller, often a family member, agrees to this deal as a form of financial help.

Explanation of a concessionary mortgage

A concessionary mortgage happens when someone sells a property at a discount to help another person, often a family member, buy their first home. This kind of sale lets the buyer climb onto the property ladder without having to save up for a large deposit.

The person selling the house might choose to sell it for less than its market value as an act of generosity or support.

This special arrangement requires that buyers still meet certain conditions set by lenders, such as passing credit checks and proving they can afford the mortgage repayments. Despite receiving the property at a lower price, buyers must navigate these financial assessments carefully.

Sellers should also be aware that they might have to pay capital gains tax on the full market value of their home, not just the discounted sale price. This makes it crucial for both parties to understand all implications before proceeding with a concessionary purchase price mortgage.

Types of properties eligible for a concessionary purchase

Council houses stand out as a primary option for those looking into concessionary purchases, thanks to the Right to Buy scheme. This initiative makes it possible for individuals to buy these properties at prices below market value, providing a unique opportunity for homeownership.

Different types of homes, including apartments and detached houses fall under this category, offering various choices for potential buyers.

Moreover, certain mortgages cater specifically to seniors, with options available for the over-80s and over-50s demographic. These tailored solutions make it easier for older adults to purchase suitable properties under concessionary terms.

Whether looking for a comfortable retirement home or downsizing options, these special mortgage plans help in acquiring property under market value efficiently.

Limitations of the discount amount

The discount on a concessionary mortgage might seem appealing, but it's not without its boundaries. Discounts can range widely, from as little as 5% to as much as 100% of the property's market value.

This variability means that while some buyers enjoy substantial savings, others might find the discounts less significant than hoped for in making homeownership more affordable.

Sellers must also consider potential financial implications beyond the sale price reduction. For instance, selling a property under market value can trigger capital gains tax obligations based on the home’s full market value, not just the sale price.

Additionally, if a seller offers a discount to a family member for a concessionary purchase UK style, this generosity could be viewed by tax authorities as a gift and may attract inheritance tax liabilities down the line.

These aspects limit how deep discounts can go without financial repercussions for sellers and possibly affect their willingness to offer substantial concessions.

Pros and Cons of a Concessionary Mortgage

Exploring the pros and cons of a concessionary mortgage can help homebuyers understand if this path suits their financial goals. A concessionary purchase offers unique advantages and challenges that impact both short-term budgets and long-term financial plans.

Advantages of a concessionary purchase

Concessionary purchases offer significant benefits for individuals aiming to climb the property investing ladder. Key advantages include financial flexibility and the ability to secure a home possibly sooner than traditional methods allow.

  1. Zero deposit requirement: One of the most compelling perks of a concessionary mortgage is that buyers don't need to save for a deposit. The discount on the property acts as a deposit, which simplifies the buying process significantly.
  2. Easier access to homeownership: This approach greatly assists individuals, especially family members, in purchasing their first home. It reduces the financial barriers that often delay or prevent homeownership.
  3. Potential stamp duty savings: Buying a house under market value might also lower the amount of stamp duty payable, making it cost-effective in more ways than one.
  4. Strengthens family bonds: Families can use this method to support each other financially. Parents or grandparents assisting in securing a mortgage strengthen relationships and provide security for future generations.
  5. Reduced property prices: Purchasing properties at below market value means immediate equity in the new home, offering buyers a head start in building their asset portfolio.
  6. Wide eligibility range: Properties can be acquired from family members, friends, landlords, employers, or housing developers using concessionary mortgages, providing buyers with diverse options.

If I Buy a House at Under Market Value, is there a Tax Liability to Pay?

There can be, particularly if you are buying from a family member:

  • Capital Gains Tax is paid on the profit you make from selling a property but isn't usually payable when you sell your primary home. If the property is a second home or part of a portfolio, a tax liability may arise.

For example, if your parents bought a home for £100,000 that now has a market value of £200,000, they might sell it to you for £150,000. Therefore, the taxable gain is the increase in market value, not the actual price you have paid.

  • Stamp Duty is payable on a new property purchase and depends on how much you pay, rather than open market value.

Therefore, if you buy a property at under-market value and it falls into the bracket below, you can significantly reduce your Stamp Duty costs by paying less.

  • Inheritance tax is possible, as the discounted price offered on a family property sale can be considered a lifetime gift.

For example, if you buy a property from a parent that is worth £500,000, and only pay £300,000, then the £200,000 difference is a lifetime gift.

If the parent passes away after seven years, you are exempt from inheritance tax but could be liable for the full 40% of the £200,000 gift if they were to pass away within three years.

Alternatives to Concessionary Mortgages

Exploring other options can lead you down a path where buying your dream house becomes more attainable without the need for a concessionary mortgage. Family offset mortgages and purchasing directly from housing developers present promising alternatives that could match your financial situation better.

Family offset mortgages

Family offset mortgages allow a borrower's family to help them buy a home by depositing their savings into a linked account. These savings then effectively reduce the mortgage balance, leading to lower monthly mortgage payments or possibly shortening the term of the loan.

This monthly repayments can result in significant interest savings over time, making it an attractive option for buyers.

This type of mortgage appeals especially to those who might not be eligible for concessionary purchases but have supportive family members ready to assist financially. It’s crucial that both parties understand all terms and conditions before proceeding with this arrangement, ensuring it fits their mutual financial goals and circumstances.

Buying from a housing developer

Buying from a housing developer opens up a range of alternatives to concessionary mortgages, including shared ownership and government-backed schemes. These developers often provide more flexibility in financing options, catering to the diverse financial situations of potential homeowners.

They might also offer enticing incentives or discounts for buyers who choose these alternative financing routes, making it an appealing choice for those looking beyond traditional mortgage pathways.

Exploring these options allows buyers to find a deal that suits their budget while potentially saving on their purchase. With the possibility of securing under-market value houses through these schemes, purchasers can enjoy the benefits of homeownership with less financial strain.

Next, let's look into what it takes to qualify for a concessionary mortgage and who is eligible.

Professional Assistance with Property Purchases at Under Market Value

Business finance broker are specialists in non-standard mortgages and offer professional advice and have whole-of-market access to recommend any product from any lender that we feel is best suited to your circumstances.

We work with a vast network of niche lenders, negotiating terms on your behalf to ensure you get the best possible deal.

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

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The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.

We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.

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