Often, the biggest hurdle to becoming a homeowner is saving up for a deposit. A concessionary purchase mortgage, if you can get one, helps by giving you the option to put down equity instead of cash.
What is a concessionary mortgage purchase?
A concessionary purchase, also called a below market value purchase (BMV), is buying a house for less than its market property value because someone has gifted the difference to you. (It’s usually – but not always – a family member.)
A concessionary purchase mortgage is the loan you can get to make this sort of transaction happen.
Here’s how it works.
How does a concessionary mortgage purchase work?
Here’s the step-by-step for a concessionary mortgage purchase:
- Someone wants to give you a whopping good deal. Perhaps your parents want to sell their home to you at a discounted price. Or your landlord wants to cut fluff off the selling process by giving you (their current tenant) a markdown on the purchase price.
- They give you a gift of equity in the form of the difference between the market value and the discounted purchase price. That’s why a concessionary purchase mortgage is also called a gifted equity deposit mortgage. It can’t be a loan or a share in the property. It has to be a gift.
- You use the gift as all or part of your deposit for your mortgage. The difference between the market value (Zoopla or RightMove can give you an idea of market values) and the price that the seller offers you can be used as part or all of your down payment.
Here’s an example:
- The market value is £300,000
- Your parents offer it to you at £200,000
- The discount is £100,000 which, for some lenders, can serve as your deposit for your mortgage
- You buy a home without having to come up with all the deposit in cash. Nice.
You can use a property that you buy through concessionary purchase as:
Concessionary mortgage purchase scenarios
A concessionary purchase mortgage may work for you if you’re buying property from:
- A family member. Other official terms for this kind of purchase are a Family Concessionary Purchase or A Transaction Under Value. This is when your parents (or other immediate family members) want to help you.
And the perks go beyond the financial value of the discount. A family concession purchase can be a gift that keeps on giving. There is a lowered chance of nasty surprises like deals that fall through or problems with the property. Plus, if it’s the home you grew up in, the actual worth of the home goes far beyond the monetary value!
- Your current landlord. Your landlord wants to sell and wants to help. They also don’t want the hassle and cost associated with selling their home on the open market. So, they offer you the property at a discounted rate. A bonus? You don’t have to move.
- Your employer. This is a less common route, but it happens. Because the ties that bind may not be as strong with your employer as they are with your family, there is some danger that you can run into ownership disputes down the line. That’s why it’s important to have everything on paper—that this is a gift and not a loan.
- A developer. Sometimes, you may be offered what is known as a developer’s discount where a developer offers you a home at an under-market rate. This is tricky to get through most lenders, as they might wonder what motive the developer has for offering the discount. Is there an issue with the property that will only be revealed later on? For this reason, this type of mortgage can be harder to get.
- An open market seller. Sometimes, you might be offered a discount by a seller on the open market. This one might also be more difficult to get a mortgage for as the lender might see it as too much of a risk. If you do get approved, it may be with some caveats. If the discount is offered because of some sort of structural damage, for example, they might ask you to put down an additional deposit to cover themselves.
It’s also worth considering if this is a concessionary purchase with an open market seller is a good idea for you. While the offer might seem like a steal initially, you may pay down the line.
This is where it’s really important to have a home survey done. We have all the details here.
How to qualify for a concessionary purchase mortgage
Like with any mortgage, certain factors affect your eligibility. These include:
- The size of your deposit. In terms of a concessionary purchase mortgage, this includes the equity in the form of the discount you were given, plus any additional down payment you can make.
- Your income. Lenders want to know that you can make your mortgage repayments.
- The mortgage length. The average is 25 years in the UK. If you want to pay it off quicker than that, they’ll want to make sure you can afford it.
- The state of the property. If they see that the property is too much of a risk to take on, it may affect your eligibility. (This may be particularly relevant if you’ve been offered a discount by a developer. The lender will be keen to know why they’re so quick to sell.)
If you think you qualify, the next steps are pretty similar to getting any other mortgage.
- Get in touch with a mortgage broker (hello, Habito!). They will help you find the lender that works for you.
- Check your own credit score. The agencies that will help you with this in the UK are Experian, Equifax and TransUnion. Try all three, as they all calculate a little differently. Checking your credit score yourself won’t affect your rating.
- Get an Agreement in Principle (AIP). This is basically a statement from the lender saying they are likely to lend you the money for the property you want to buy. It often serves as the first part of your official mortgage application. (We’ve got all the details on AIPs here.)
Can you get a concessionary mortgage with a bad credit score?
A bad credit score is not a deal-breaker for concessionary purchase mortgages. Many lenders will look at your credit score as only one of the factors that they use to make their decision. There’s usually more to every story.
Also, not all credit woes are created equal. Declaring bankruptcy, for example, is not quite the same as making some late payments on your credit card.
Wherever you sit on the credit score spectrum, it’s still worth giving it a shot. And if you get turned down by one lender, you may not be turned down by all. Lenders have different criteria that they base their decisions on, and while one may be reluctant, another might be willing.
The bottom line? While a closed door can be disappointing, don’t worry, it might not be final.
Who offers concessionary purchase mortgages?
Because not all lenders will take them on, finding a provider for a concessionary purchase mortgage can take a bit of time.
But in terms of processes to follow, the journey is pretty similar to other mortgage hunts. A mortgage broker (like Habito) can really help find you the best fit. Here’s our step-by-step guide that will give you all the information you need.
Pro tip: if a lender is willing to offer you a concessionary purchase mortgage, the value of the home might be under some scrutiny. They’ll want to ask the big question—why would someone offer you such a huge gift? With family concession purchases, this may be easier to understand, but even then, they’ll likely want to do the background work.
- Ask you to prove that you’ve lived in a rental property for a particular length of time. If you are looking for a landlord concessionary mortgage, they’ll want to know that the relationship is legit.
- Require extra surveyance before signing. Particularly if you’re purchasing from a developer. They need to know it’s all above board.
If everything checks out, here’s what they could offer you:
- 100% of the mortgage. 🎉 For some lenders, the difference between the market value and what you’re buying the property for is seen as your full deposit. In this best-case scenario, they don’t require you to add any of your own cash to the equation. For this to happen, the value of your offer must meet their minimum deposit requirements—usually about 90% of the market value of the home.
- A mortgage where you need to supplement the deposit. Here, you may need to add in at least 5% of the total deposit amount. Some lenders may push for this—particularly if it’s a transaction that is happening outside of families.
What are the limits of a concessionary purchase mortgage?
The limits that are placed on your mortgage will be specific to each lender. Here are the more universal ones:
- It has to be a gift. This is very important and should be outlined in all legal documents to prevent disputes down the line.
- You may have to pay stamp duty. If you buy a property, you have to pay specific taxes to the government so that the transaction can be legally recorded. This is called stamp duty. If you’re a first-time buyer, you do not have to pay stamp duty on properties up to the value of £300,000.
If you’re not a first-time buyer, you might have to pay stamp duty on the open market and not the discounted value of your property.
- Your parents might not be able to live in the house after it’s sold to you.
- You may have to factor in the capital gains taxes (CGT) that the seller will have to pay. These might also be based on market rather than discounted value.
- You may not be able to get a buy-to-let mortgage if you’re purchasing from your landlord. Lenders may not be too keen to sell you your home only to have different tenants move in.
Good luck with your purchase. We’re here to help at every step of the journey. Here’s where you can find us.