Although there are many challenges faced by first time buyers, there are also more options than ever before to help enable the first steps onto the property ladder from government assistance schemes to an increased range of financial products enabling help from friends and family members in different ways.
Mortgage lenders are continuously adapting to the property market conditions, offering various methods of borrowing finances to purchase a property.
This guide will explore everything in connection with concessionary purchases including the finance options available.
What is Concessionary Purchase?
A concessionary purchase occurs when a property is purchased for less than the market value. Another term used to describe this scenario is below market value or BMV.
Therefore, a concessionary mortgage is a financial product used to purchase a property at less than the market value.
There may be a variety of reasons why a property would be sold at less than the market value, for example;
• Discounts may be offered due to the property transaction due to take place between family members.
• There may be an existing relationship between the vendor and purchaser such as previous landlord or employer and therefore a discount may be offered.
Benefits of Concessionary Purchasing
Purchasing property from family has a variety of benefits including family providing assistance with financing property, as well inside knowledge of the property history, reducing surprises than can occur with property ownership such as broken boilers or planning permission issues.
Also, this option provides a method of retaining property within the family for sentimental reasons.
How do Concessionary Mortgages Work?
Instead of alternative methods such as a family assisted/guarantor mortgage or cash gifts from relatives to help towards deposits, a concessionary purchase could be undertaken by a parent, for example, offering to sell their property to their child at a reduced rate.
The difference between the market value and the reduced price, therefore, acts as a gifted equity deposit.
Some lenders will be willing to offer mortgages at 100% of the property value however, others will also require a deposit of between 5% and 10% of the property value. Most mortgage terms offered will depend on the mortgage applicants’ credit record as well as other factors such as market conditions and competitiveness between lenders.
Interest rates on concessionary mortgages
Concessionary mortgage interest rates often do not differ from interest rates on standard market-wide mortgages, however alike most financial products, the actual rates offered are usually dependent on the applicants’ credit history.
In addition, the rates offered on a concessionary mortgage can vary due to the following factors:
• The level of discount that the property was purchased for against the market value.
• If an additional deposit is being put down towards the mortgage.
• Affordability factors of the applicants.
Buying a house from a family member at a discount
Some lenders may require that the property transaction related to a concessionary mortgage is between close family members only such as between parents, grandparents and children. Whilst other lenders may have more relaxed definitions of the family members to include Aunts and Uncles.
There are other factors to consider when reviewing methods of purchasing a property with the help of family members. For example, some lenders will not allow for the parents to live within the property once it is sold, and therefore funding additional property for the parents to reside within then becomes a supplementary concern.
Should a lender allow parents to remain living within the property that has been sold, often a condition is added to the mortgage that the parents must sign a ‘waiver of rights’ which, if their circumstances change, later on, it may leave them in a vulnerable position?
Therefore, it is strongly advised that all parties seek both independent financial and legal advice before committing to a concessionary property transaction.
Other Considerations in Relation to Concessionary Mortgages
Obviously, with all family-related transactions, a lot of trust is required between all parties concerned. It has been known that later on down the line following concessionary purchase issues have been raised regarding disputes over ownership and rights to the property.
Therefore, it is vital that the legal side of the property transactions are covered entirely, not leaving any doubt of the intent of the transaction.
It is worth noting that stamp duty works in the same way as standard property purchase and therefore this tax may be payable depending on the purchase value and the government rules and tax band levels at the time of purchase.
Concessionary Mortgages between Landlords and Tenants
After many years of living within a rented property, tenants may wish to purchase it, and in certain circumstances, landlords may be willing to accept such requests.
By transacting between known parties, there can be time and money saved but also reduced the stress involved as both intent and often affordability factors are more known of the purchasers/tenants and therefore property purchase chains are less complicated and less likely to breakdown.
Landlords can save money by not using estate agents, and therefore may be willing to sell the property to the tenants at a reduced rate. There are common conditions that landlords must meet to sell directly to tenants, at a below market value rate such as:
• Discounts usually should not exceed 10% of the property price
• The tenants may be required to also pay a deposit
• Tenants must have lived within the property for at least one year
However, some lenders may be more lenient regarding these conditions depending on other factors such as affordability and cash deposit level of the mortgage applicants.
Concessionary transactions between Landlords and Tenants are fairly rare and therefore there are fewer mortgages offered in this way, however, a mortgage advisor would be able to advise on the lenders that are most likely to offer such terms.
Concessionary Purchase Summary
There are many benefits of concessionary purchasing including family members providing financial assistance enabling the purchase of property, however, there are considerations to review such as the legal position of the parents involved as well as where they will live once the transaction is complete.
Each case is individual and therefore its is strongly advised that specialist financial advice is sought during the investigation stage before any decisions are made.
Call us today on 01925 906 210 or contact us. One of our advisors can talk through all of your options with you.