Many people have to spend years saving for a large deposit and cultivating a strong credit record to access the best deals. For some of us, however, there is a shortcut – concessionary purchase mortgages.
Let's explore the idea of concessionary purchase mortgages - including who normally gets one and what they involve.
The Topics Covered in this Article Are Listed Below:
- What Is the Concessionary Purchase Mortgage Definition?
- Who Is Most Likely to Get a Concessionary Purchase Mortgage?
- When Else Are Concessionary Purchase Mortgages Used?
- How Can to Get a Concessionary Purchase Mortgage
- Am I Eligible for a Concessionary Purchase Mortgage?
- How to Choose the Right Concessionary Purchase Mortgage Lenders
- Is a Concessionary Purchase Mortgage a Good Option for Bad Credit?
What Is the Concessionary Purchase Mortgage Definition?
In its simplest terms, a concessionary purchase is where a property is sold for less than its market value.
So, if an estate agent estimates the value of a property at £150,000 and the property owner sells for £125,000, the buyer would take out a concessionary purchase mortgage.
Another term for concessionary purchases is BMV (below market value) purchases.
Who Is Most Likely to Get a Concessionary Purchase Mortgage?
Parental Family Concessionary Mortgages
On the open market, landlords and property investors work to make a profit, not a loss. When family are part of the equation, avoidance of loss can be less of an issue.
You may have parents or grandparents who want to help you become a homeowner and buy your first house. Rather than remortgaging and gifting deposit money, they may sell a second home or even downsize their current home, offering the outgoing property to you for less than its market value.
By selling to you for less than the market value, they’re essentially gifting you equity in the property. This gifted equity basically acts as your mortgage deposit, lowering your LTV and thus the amount you need to borrow on a mortgage – hence why we say concessionary purchase.
It’s worth noting that if the original owner(s) die within 7 years of the concessionary purchase transaction, you may have to pay Inheritance Tax on the gifted equity.
When Else Are Concessionary Purchase Mortgages Used?
Aside from immediate family, there are a few other circumstances in which you may be offered a concessionary purchase mortgage. See below.
Landlord Concessionary Mortgage for Long-Standing Tenants
If you’re a long-standing tenant, you may be able to negotiate a concessionary purchase of a property from your landlord. The idea is that you’ve already made rental payments each month. As a “thank you”, the landlord uses a proportion or the entirety of your accrued rent to discount the property.
For the landlord, they benefit from avoiding the private property market. This saves them money on property fees, estate agent costs and more, making a concessionary purchase financially viable.
There are limits to BMV property sales from your landlord, however:
- The maximum discount is usually only between 5% - 10% of the market value – with a £100,000 property having a max discount of £5,000 to £10,000
- The LTV (loan-to-value) must be at least 95% with a 5% deposit
- A minimum time as a tenant must be met, such as 1 year or 2 years
- Options like rent-to-own may not be available with certain lenders
Property Concessionary Discount from Employers
In some cases, an employer may have property assets they wish to offload. This could be as part of a contract negotiation as an alternative to providing shares, bonuses or other benefits to employees.
In this scenario, employers must emphasise that the property discount is a gift. Any discount must be void of conditions or stipulations, achieved with a waiver of rights.
Housing Developers Selling Below Market Value
It’s rare that a housing developer will offer BMV properties, but it does sometimes happen when developers encounter problems with cash flow, or simply when the priority is a fast sale.
From a lender’s perspective, BMV developer properties appear risky. A brand new property has been built and valued at a higher price, but the developer wants to sell for less? This is akin to the adage – “if it’s too good to be true, it probably is”. Be sure to check for EPC ratings, structural integrity and general quality of fit and finish before opting for a BMV developer property.
Fixer-Uppers on the Private Property Market
Perhaps a property is highly valued in terms of land, bricks and mortar, but the property itself is old and dilapidated. A new buyer will inherit the problems with the property, so a discount below market value is needed to offset the renovation costs.
Put simply, BMV properties on the open market will almost always be “fixer uppers” that require significant work to become liveable. The problems are a risk for lenders too, meaning higher deposits or higher interest rates.
How to Get a Concessionary Purchase Mortgage
Not all lenders offer concessionary purchase mortgages, so you’ll find it much easier securing a good deal if you use a broker like John Charcol.
The lenders that do offer concessionary mortgages will ask you: “why is the existing owner selling the property below market value?” They will ask you this question to better understand your relationship with the seller and whether they will continue to live in the property with you.
Otherwise, the mortgage application process is very similar. Any gifted amount or discount is subtracted from the property value and used as a base value for the mortgage.
- A family member offers their property valued at £100,000 to you for £80,000; a discount of £20,000 or 20%
- This means your parents are essentially gifting you £20,000 in equity, which your lender will use as a deposit
- You then only need to get an 80% LTV mortgage
- By reducing the LTV, you don’t need borrow as much from the lender, meaning you’ll be able to pay it back earlier and you’ll get a better rate on your mortgage
Am I Eligible for a Concessionary Purchase Mortgage?
Factors that impact eligibility include all the normal things lenders look at, as well as a few additional things associated with the concessionary purchase itself:
- Bad or good credit history - bad credit history will increase lending risk, leading to higher deposit requirements, higher interest rates or both. Good credit history will reduce lending risk, reducing interest rates and deposit requirements
- Deposits – with a concessionary purchase, at least part of your deposit will come from the equity gifted to you by the seller. If this is only 5% of the property’s market value, then you’ll find your pool of lenders limited as you’ll not only need to find a lender that does concessionary purchase mortgages, but also one that offers products at 95% LTV. You can combine your savings with the gifted equity to increase your mortgage deposit and give you a bigger variety of lenders and products to choose from
- Proof of earnings – the discount on the property makes it more affordable for the buyer, but you still need to pass affordability checks. Lenders normally use between 4.5x and 5.5x of the annual earnings of the applicant, as a maximum mortgage allowance. Someone earning £25,000 per year, after tax, could theoretically take out a concessionary purchase mortgage between £112,500 (4.5x) to £137,500 (5.5x)
- The property itself – with concessionary purchase mortgages, the state of the property itself is important. The market value stated on the application may be based on the assumption that the property will go up in value after renovation – also known as GDV (gross development value) - which no lender will rely on. Instead, the lender will consider the property at its current market value, based on its current condition. This means that you may not have as much equity in the property as you first thought
How to Choose the Right Concessionary Purchase Mortgage Lenders and Providers
As with regular mortgages, you’ll have the best chance of finding a great concessionary purchase mortgage deal by using a broker like John Charcol. We learn about your situation and then compare the different lenders and products on the market to find you the best interest rate, term and requirements for your circumstances.
Is a Concessionary Purchase Mortgage a Good Option for Bad Credit?
Since a concessionary mortgage involves discounts on the real market value of a property, it can increase the likelihood of mortgage acceptance with a bad credit history.
One of the main ways to secure a mortgage with a less than perfect credit record is to put down as big of a deposit as you can. This is because you may be limited to a small pool of lenders if you have bad credit, but a bigger deposit lowers your LTV, giving you access to more lenders and deals.
The discount – or gifted equity – from a concessionary purchase essentially acts as a mortgage deposit on the property. It lowers your LTV without you needing to save as much yourself and can help you secure a better deal.
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