It might seem a bit odd at first to imagine that there can be mortgages on properties sold below market value. In fact, it’s a common accepted practice. It could be a deal between family members, or to ensure a quick sale, or perhaps a house bought at an auction. Whatever the reason, it’s possible to get a mortgage on a property sold under market rates. However, there are various risks and tax implications which you’ll also need to consider.


Can I Get a Mortgage to Buy a House Below Market Value?

The simple answer is yes, you can get a mortgage to buy a house below market value. There’s nothing unethical or illegal about buying a property below market rates or getting a mortgage to cover the transaction. It should be possible to find a mortgage lender who can help if their eligibility and affordability criteria are met. Lenders are likely to pay careful attention to your mortgage application, especially in terms of assessing the current market value of similar properties recently sold in the neighbourhood, as well as the agreed sale price. Your lender will use a Royal Institute of Chartered Surveyors (RICS) to determine the property’s market value.

RICS defines market value as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in arm’s-length transaction after property marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

The main thing to consider when buying a property at below market value is that, depending on which lender you use, they’ll either base the LTV (loan-to-value) of the mortgage off the market price OR the below market purchase price.

If they use the market price, then you’ll start off with more equity in the property (comprising your deposit and the value in-between the purchase and market price) and a lower LTV – which will give you access to better rates.

If they use the purchase price, you won’t benefit from a lower LTV and lower rates, but you’ll still be buying a house for less than market value.

In either circumstance, the mortgage loan amount that you borrow would be the same.

If you’re buying a property below market value that you intend to use as your main residence, then you’ll apply for a standard residential mortgage.

If you’re planning to buy a property below market value to use as a buy-to-let, you can expect additional scrutiny, including a close assessment of rental values in the area. You’ll likely face higher fees and interest rates compared to a standard mortgage.

In cases where the property transaction does not involve family members or estate agents, the mortgage lender is likely to be a little suspicious, as the low price may be a sign of some form of collusion between buyer and seller and may involve fraud. If the seller is in a hurry, it may be because they face bankruptcy proceedings and are keen to avoid the property being seized. In some cases, a property that has been sold ahead of bankruptcy processes may still be subject to charges.


What Are the Advantages of Buying a House Below Market Value?

Aside from the obvious advantage of the property being cheaper, there are various other benefits.

  • Your loan will be lower, which means you’ll have less to repay and potentially less interest will be charged
  • If house prices in the area fall in value after the purchase, your lower than market value purchase provides protection against the downturn
  • If it’s a concessionary purchase between family members, you’ll avoid paying estate agent fees
  • Again, with concessionary purchases, some lenders will consider the difference between the market value and the sale price as the deposit for the mortgage. This means you could start with more equity in the property and benefit from lower rates

Are There Any Risks Linked to Buying a House Below Market Value?

There are risks which you should also consider when deciding to buy a house below market value. For example, if the reduction in value is because it’s a concessionary purchase from your parents, that reduction is considered a gift. If your parents go bankrupt in future, the Official Receiver appointed will have the power to recover money from under-value transactions, including the property.

In addition, if your parents sell you a property, they'll relinquish ownership and have no rights to any income derived from the house. This means they no longer have any control or rights over the property which is obviously something you’ll need to discuss with them to avoid any potential issues later on.

It’s important to get independent legal advice before you finalise your decision to buy a property from a relative.

How Much Stamp Duty Do I Pay?

As the buyer, you pay SDLT (Stamp Duty Land Tax) on the purchase price, not the market value. Essentially, if you’re buying the property below market value you could pay less Stamp Duty Tax. Stamp Duty rates differ for primary residences and second homes. The rates are also different if you’re a first-time buyer.

Purchase Price Standard SDLT Second Home SDLT
Up to £125,000 0% 3%
£125,001 - £500,000 2% 5%
£250,001 - £925,000 5% 8%
Purchase Price First-Time Buyer
Up to £300,000 0%
£300,001 - £500,000 5%

What Are the Other Tax Considerations When Buying a House Below Market Value?

Aside from Stamp Duty, there are 2 other forms of tax to consider when thinking of buying a house below market value.

Capital Gains Tax (CGT) is a tax you pay on a portion of the profit – or capital gain - you accrue from the sale of various assets, including land or property that is not your main residence. While CGT does not apply to the sale of the property you live in, it does apply to the sale of any secondary property. CGT is determined using the property’s market value, not by its sale price.

Let’s take an example. If you’re considering selling a house below its market value from your portfolio of properties, this may incur a CGT cost. So, if you bought a second home for £200,000 and is now worth £350,000, even if you agree to sell it for £300,000, the capital gain that can be taxed is £150,000, not £100,000.

The CGT amount is currently 18% for base-rate taxpayers and 28% for high-rate taxpayers (after CGT allowances). Base-rate taxpayers are liable to move into the higher threshold for any portion of the CGT gain within the high-rate band. You can use our CGT calculator to work out how much CGT you may be liable to pay.

A second potential tax burden on the seller of a property sold at below market value is IHT (Inheritance Tax). The discount offered on a property by a parent can be considered a lifetime gift. A lifetime gift is where cash or assets are given away during someone’s lifetime. Lifetime gifts can reduce the amount of Inheritance Tax due upon death and are often used as part of Inheritance Tax planning.

Let’s imagine you agree to sell a property for £250,000, but the actual market value is £350,000. The difference between the purchase price and the market value is in this example £100,000. This is the lifetime gift value used to calculate IHT.

If you die within 3 years of providing this lifetime gift, the full 40% IHT will be levied. If on the other hand, you die up to 7 years afterwards, there will still be an IHT liability. However, after 7 years, the IHT liability is 0%.


Are There Other Reasons Why a Property Might be Sold Below Market Value?

A property could be sold under market value due to problems or issues with it, which may involve extensive and expensive repair works. It’s important to consider the type of survey required if you suspect that the property may have hidden issues that may evade a basic property assessment.

It’s important to note that some properties may be valued below market rates due to their location. You may be able to buy cheap property in rural or isolated locations. While this may seem like a very good deal, you may face issues down the line trying to sell the property for a profit, or if you try to rent it out.

Houses sold at auction can be between 25 - 35% less than their actual market value. Often, properties bought at auction can require significant renovation, which may mean that the lower than market value price is misleading, given the total cost of repair and refurbishment works required to move in.

For auction properties and especially if you’re considering letting out the property, you may also wish to consider a bridging loan. You can use this money to purchase the property quickly and then switch to a buy-to-let mortgage. You should also be aware that when the gavel falls on your successful bid, you’re typically expected to pay a 10% deposit of the bid price immediately.


Can I Get a Concessionary Mortgage with a Poor Credit Rating?

A bad credit score need not be a reason for not being offered a concessionary purchase mortgage. Lenders will often review your credit rating as one factor among several to determine whether to grant you a mortgage. Credit ratings vary widely in terms of their components. Bankruptcy is a far more serious matter than a few late payments on your credit card. So, even if your credit rating is not ideal, it’s worth approaching a few lenders, as they often base their decisions on different evaluation criteria.

Nonetheless, if you’re concerned about your credit rating then talk to one of our experts at John Charcol. We can review your credit report to consider how serious the bad credit is and can then use this information to direct you towards the right lenders. Call us on 0330 433 2927 for more information.


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