One of the biggest hurdles that first time buyers have to overcome is saving up for the initial deposit.
Family members often step in to help, with offers of gifted deposits or guarantor assistance.
A concessionary purchase is another helping hand, allowing the first time buyer to purchase a property for less than the market value price and avoiding the delay of saving for a cash deposit.
Read on as we explain what a concessionary purchase mortgage is, how it works and where to get one.
What is a concessionary purchase?
A concessionary purchase is where a property is sold for less than it’s true market value.
The owner chooses to sell for a discount, usually to someone that they already know.
The different between the purchase price and the open market value is called ‘gifted equity’. These transactions can also be referred to as a ‘below market value (BMV)’ purchase.
A common scenario would involve a parent selling to a child or a landlord selling to their tenant.
What is a concessionary purchase mortgage?
A concessionary purchase mortgage allows the concessionary purchase to take place, with the lender permitting the discount to be used as deposit or equity.
The overall aim is for the discount to be used as a deposit when calculating the loan to value percentage and overall eligibility.
The next section covers this in a bit more detail but here’s a quick example:
A parent owns a property that is worth £350,000 (if sold in an estate agents window).
Rather than sell it, they would like their son to buy it, and only require him to pay them £250,000.
Using a concessionary purchase mortgage, the son would apply for a £250,000 mortgage and ask the lender to use the equity discount of £100,000 as a mortgage deposit.
The mortgage loan to value would then be: £250,000 / £350,000 = 71.50%
How does a concessionary purchase mortgage work?
The key is finding a lender that will use the equity discount when calculating the mortgage loan to value.
Continuing with our example, a mortgage of £250,000 on a property worth £350,000 gives a loan to value percentage of 71.50%.
However, the son wants a mortgage of 250K to buy the house for 250K, and that’s a 100% mortgage.
Being able to use all of the discount as the deposit is a best case scenario. There are a number of lenders who will ask the purchaser for a cash deposit in addition to the equity discount.
Once that is agreed, the other mortgage options and requirements are just like any other house purchase mortgage.
You will find more useful information in our Guide To Deposits
Selling for a discount
Why would someone sell a house for less than it’s worth?
Quick sale
Sometimes this happens when there is a need for a quick sale, funds are urgently needed and so the seller drops the price and looks for a cash buyer.
Family
Often it will be a parent, or grandparent who want to help their children on to the property ladder, or maybe help them further up the ladder.
Rather than selling or remortgaging they can offer you the opportunity to buy a property from them but at a discounted price.
The level of discount is completely up to them, it could be 5%, 50%, £10,000 or £100,000 or more.
Landlord
Another common situation is where a landlord offers a buy to let property to the tenants who currently live there.
This could be because the tenants have been good tenants and looked after the property. Or they are mid-tenancy but the landlord really wants to sell up now.
Equally it could be for convenience: There will be no estate agent needed and no property chain.
From a property investor point of view there’s also no need to gut the property and redecorate etc.
Developer
There are times where a property developer will offer a developers discount and reduce the price against the open market value.
These can be difficult to get approved as the lender will be wondering about the developer’s motives, or that the so called open market value is inflated.
Tread carefully with these ones.
Property valuation
The property that you wish to buy will need to be valued by the mortgage lender.
This can only happen after you have applied for the mortgage, and paid the valuation fee.
Your mortgage offer will then be based on the valuation given by the lender’s surveyor.
It is therefore vital that the stated value of the property is as accurate as it can be.
If your family think a house is worth 350K but the valuation comes back as 300K then your mortgage situation changes. The lender will only work on their (300K) valuation figure.
In our example using a mortgage of 250K, the 71% LTV goes up to 83%.
This example scenario would probably still work out OK, but where the initial LTV is higher there’s much less room for errors and valuation discrepancies.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Eligibility criteria
The overall process with a concessionary purchase mortgage is much the same as a standard moving home mortgage or first time buyer mortgage.
First, you need to make sure that the LTV percentage against the open market value is low enough. A 5% difference between the two gives you a 95% mortgage.
In theory this is OK but there’s not a lot of margin for error.
If practical, you are free to add some cash of your own to boost the deposit and lower the LTV. Doing this could also open up a few mortgage lenders to pick from.
Next comes affordability.
Whatever the LTV is, the lender still needs proof that the mortgage is affordable for you.
Affordability checks will first look at the income you have coming in, some lenders will be happy with more than one stream of income, or complex income scenarios.
Then they look at how you spend that money, expect all lenders to ask for 3-6 months of bank statements, to see how many times you use Deliveroo or Costa Coffee each month!
Credit checks
All lenders will carry out credit checks, looking at your credit report and credit score.
If you are at all unsure about your credit status it’s probably a good idea to get a copy of your credit report to make sure everything’s accurate and OK.
How much can you borrow?
The amount that you can borrow will depend on your provable income and the property value.
Most lenders are able to offer 4-4.5 times your annual gross income.
So with an income of £50,000 you could borrow £200-£225,000.
This will be adjusted for affordability and existing credit commitments. So if you have car finance, loans or credit cards this figure would normally be reduced.
You could ask your mortgage broker to apply for a Decision in Principle to give you an indication of how much you could borrow.
You might find these pages helpful:
Professional occupations
A small number of lenders classify certain occupations as ‘professionals’ and are able to offer them enhanced lending terms.
The main advantage is higher income multiples, allowing you a bigger mortgage. Rather than the standard 4-4.5 times income, these professional mortgages can go up to 5-6 times income.
The list of occupations will include: solicitors, teachers, vets, accountants etc
Mortgage options
There’s quite a few mortgage choices to make, beyond how much you would like to borrow.
If you are working with a mortgage broker then they will have discussed these with you. But the main ones are:
- Repayment method (repayment or interest only)
- Interest rate type (fixed, tracker etc)
- Mortgage term
- Option to make overpayments
- Higher Lending Charges
Our guide to the different mortgage types will provide more info and help you to decide.
There has been a move to selecting a longer mortgage term, particularly by first time buyers. These so called marathon mortgages have terms of 30-40 years which then makes the monthly payments more affordable.
You should also think about the need for life cover. The basic idea of life insurance is it pays out when you die. Plans can pay out a lump sum (to repay a mortgage) or a regular monthly payment (to replace a lost income).
You don’t have to take out life insurance when applying for a mortgage, but it might be a good idea to do so. As with all things financial, remember to shop around and check different policies and prices.
How a broker can help
One main advantage of using a mortgage broker is that they have access to well over 100 lenders, so you get the maximum amount of choice.
And they have access to a wider range of mortgage products than you could find on your own, including deals exclusive to brokers.
But getting the right advice when securing a concessionary purchase mortgage is also key.
Experienced advisers will understand how a concessionary purchase works, and will be aware of the lenders that work with BMV purchases. (Not all lenders like them).
Let Respect Mortgages help you get the right mortgage advice.
We can match you to an award winning independent mortgage broker for free. They specialise in family mortgages, including concessionary purchases, and have qualified brokers all over the UK.
To get started, call us on 0330 030 5050 or tap the button below.
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