With house prices and the cost of living continuing to rise, it comes as no surprise that saving for a deposit is the biggest challenge most buyers face these days when buying a home.
A concessionary purchase enables you to buy a home below market value, using the equity in the property to fund some or all the deposit.
How does a concessionary purchase work?
Firstly, you will need to find someone to sell you a home at a discounted price below market value.
In most cases, this is a parent or close family member helping a loved one onto the property ladder. A small percentage of mortgage lenders allow you to buy using a concessionary purchase mortgage from a friend or someone of no relation.
The discount can then be used to fund some or all the deposit, some lenders may insist that you contribute your own deposit in addition to the discounted equity deposit. Some lenders will insist on a minimum genuine discount, for example, 10% of the property value.
In some cases, the minimum 10% deposit requirement can be made up of a combination of both your own funds and a genuine discount. The buyer then takes out a mortgage for the remainder of the property value, this is a discounted purchase price minus any personal deposit provided.
Market value – £300,000
10% Gifted equity deposit – £30,000
Discounted purchase price – £270,000
Buyer takes £270,000 mortgage
Market value – £300,000
5% Gifted equity deposit – £15,0000
Discounted purchase price – £285,000
Buyer puts down 5% deposit – £15,000
Buyer takes £270,000 mortgage
What types of concessionary purchase mortgages are there?
The types of concessionary purchases commonly encountered include:
Family concessionary purchases: This occurs when a family member sells a property to another family member at a below-market price or provides favourable terms, such as a reduced deposit or discounted interest rate. It can be a way to help a family member get onto the property ladder or facilitate a property transfer within the family.
Landlord concessionary purchases: In this scenario, a tenant has the opportunity to purchase the property they are currently renting from their landlord at a discounted price or with special terms. This can be a mutually beneficial arrangement for both the landlord and the tenant, allowing the tenant to become a homeowner and the landlord to sell the property.
Employer concessionary purchases: Some employers may offer concessionary purchase schemes as part of their employee benefits package. This can involve providing employees with the opportunity to purchase properties at a reduced price or with favourable financing terms. These schemes are designed to support employees in homeownership and may be specific to certain industries or companies.
Developer concessionary purchases: Less commonly, developers may offer concessionary purchases to certain buyers as a way to promote sales or meet specific objectives. This could involve discounted prices, incentives, or favourable financing terms. These
concessions are typically available for a limited period or specific units within a development.
It’s important to note that the availability and specific terms of concessionary purchases can vary depending on the circumstances, parties involved, and local regulations. Working with a mortgage broker like Strive and seeking legal advice can provide valuable guidance in navigating the specific requirements and considerations associated with each type of concessionary purchase.
Why would someone sell at a discounted price?
If it’s a friend or family member, it will usually be out of love and kindness to help them onto the property ladder.
If, for example, you’re buying off your landlord, they may be keen for a quick sale. If you’re mid-way through your tenancy agreement, the landlord may want to sell quickly. They would only be able to sell to investment buyers whilst you are tied into a contract and still living there, therefore reducing the chances of getting a decent offer.
They will save on estate agency fees; estate agency fees are generally around 1% of the purchase price + VAT. If your landlord were to serve you notice and instead decide to sell on the open market, there’s a chance that you could move out of the property at the end of your tenancy and the landlord’s buyers withdraw from the sale.
In this instance, the landlord would have a vacant property for a period of time and be losing money until they re-sold. This risk is avoidable if they sell to their tenant.
Can your relative stay in the property after you’ve bought it?
Normally, most lenders insist on vacant possession and require the seller to confirm they will retain no further interest in the property.
What are the interest rates on concessionary purchase mortgages?
The mortgage products and interest rates are no different than those available to other applicants. The interest rates will depend on the products available to you and the market conditions at the time.
The level of deposit will impact your interest rate, the loan to value will be based on the full market value, not the discounted purchase price.
£30,000– discounted equity deposit
£15,000– personal deposit
£45,000 total deposit – 15% or 85% LTV
LTV = Loan to value
Whilst a concessionary mortgage is relatively simple to arrange if you’re buying off a family member, anyone looking to get a discount from an employer, developer or open-market seller will find their options far more limited and potentially subject to higher rates.
How much can I borrow on a concessionary mortgage?
The affordability calculations are the same as on a regular purchase and will depend on your own circumstances. Generally, most lenders will lend between 4-5 times your income, although this can vary depending on your age, income & outgoings, credit score and deposit level.
What are the tax implications of a concessionary purchase?
Stamp Duty is payable on the consideration stated within the contract of sale, not the actual market value of the property. The challenge you may face is that some mortgage lenders will require you to treat the discount as a gift and require you to state the full market price in the contract, and thus you would have to pay stamp duty on that figure.
Use our stamp duty calculator to find out how much you would need to pay.
Capital gains tax
If the property being sold is and has always been the seller’s main residence, then they will not pay capital gains tax. If the property is or has been a Buy to let or second home, then capital gains tax may be payable.
Capital gains tax is payable on the market value of the property, not the discounted value.
There may be inheritance tax implications if the person who sells you the property at a discount dies within 7 years of the sale.
Not all lenders offer concessionary mortgages, and some will be more suited to you than others. Having an experienced independent mortgage broker to help you navigate & understand your options will give you the best chance of success on your application.
Which lenders consider concessionary purchase mortgages?
While many lenders consider concessionary purchase mortgages, it is important to note that some may require you to provide your own deposit in addition to the concessionary funds. Furthermore, certain lenders may have high loan-to-value caps or stricter criteria.
However, lenders such as Halifax, NatWest, and Nationwide are generally known for having more flexible criteria when it comes to concessionary purchase mortgages. It is advisable to consult with a mortgage broker who can assist in identifying lenders that best suit your specific circumstances and requirements.
What is the process?
The process of securing a concessionary purchase typically involves the following steps:
Discuss provisional price: Start by discussing the purchase price with the landlord or family member who is willing to sell the property to you at a concessionary rate. This initial negotiation helps establish a tentative agreement on the price.
Speak with a mortgage broker: Consult with a mortgage broker who specializes in concessionary purchases. They can assess your financial situation, explain the requirements
of this type of purchase and guide you through the mortgage process.
Arrange an Agreement in Principle (AIP): With the assistance of your mortgage broker, obtain an Agreement in Principle from a lender. This document indicates that you are likely to be approved for a mortgage up to a certain amount based on your financial circumstances and the lender’s assessment.
Finalise the price: Once the AIP is in place, finalize the purchase price with the seller. This involves reaching a mutually agreed-upon figure that reflects the concessionary nature
of the purchase.
Submit your mortgage application: Work with your mortgage broker to complete the formal mortgage application. Provide all necessary documentation and information required by the lender to process the application.
How can Strive Mortgages help?
A mortgage broker can provide valuable assistance with a concessionary purchase mortgage in several ways:
Expertise in concessionary purchase mortgages: Mortgage brokers have in-depth knowledge and experience in various mortgage products, including concessionary purchase mortgages. They understand the specific requirements and eligibility criteria associated with these types of mortgages.
Access to multiple lenders: Mortgage brokers have access to a wide network of lenders, including those who offer concessionary purchase mortgages. They can help identify lenders that specialize in these types of mortgages and have the flexibility to accommodate unique circumstances.
Finding suitable mortgage options: Based on your specific financial situation and needs, a mortgage broker can help you navigate the available options and find a concessionary purchase mortgage that aligns with your requirements. They can consider factors such as interest rates, terms, deposit requirements, and any additional features or benefits associated with the mortgage.
Mortgage application assistance: A mortgage broker can guide you through the mortgage application process, helping you gather the necessary documentation, complete paperwork accurately, and submit the application to the lender. They can also liaise with the lender on your behalf and address any queries or concerns that may arise during the process.
Negotiation and rate comparison: Mortgage brokers can negotiate with lenders to secure competitive interest rates and favourable terms on your behalf. They can provide rate comparisons from multiple lenders, allowing you to make an informed decision.
Personalised advice and support: A mortgage broker can provide personalized advice based on your unique circumstances. They can help you understand the implications and benefits of a concessionary purchase mortgage and provide guidance on the most suitable options available to you.
Overall, a mortgage broker like Strive can simplify the process of obtaining a concessionary purchase mortgage, save you time and effort, and increase your chances of finding a mortgage that meets your needs. Get in touch with us today.