Concessionary Purchase Mortgages

If you’re looking for an affordable way to get on the property ladder then you might want to take a look at concessionary purchase mortgages – an option that could mean you don’t need to save for a deposit.

In this guide we’ll take you through the whats, whys and hows of concessionary purchase mortgages, including how to get the best rates and avoid potential pitfalls by using a specialist broker.

What is a concessionary purchase mortgage?

A concessionary purchase mortgage is a specific type of home loan taken out when you’re buying a property for less than its market value.

They’re a great way to get on the property ladder if you’re finding it hard to save, as many lenders will be prepared to take some or all of the discount in lieu of a deposit.

Let’s take a look at a simple example:

You’ve been renting for a long time and are struggling to save enough to get the deposit you need.

Your parents have a property currently valued at £250,000, but they agree to sell it to you for £200,000 – 80% of its market value. This would be classed as a concessionary purchase and so eligible for a mortgage on that basis.

In this example, some lenders may be prepared to offset the £50,000 discount against the entire deposit and loan you the full £200,000, with no deposit required whereas others may ask you to contribute an amount of your own towards a deposit, although not as much as you would normally be required to put down.

In some cases a lender may choose to see the discounted sale price as the market value and ask you for a standard deposit based on this.

Although this does mean you have to have some money saved, you’ll still benefit overall.

For example, if you were purchasing a £250,000 house at full price and were required to have a 10% deposit, you’d need £25,000 upfront and a loan of £225,000.

At the discounted price of £200,000 you’d only need £20,000 as a 10% deposit and then a loan of just £180,000.

The one non-negotiable of this type of mortgage is that the discount must be a gift with no conditions attached or any stipulation for it to be repaid at a later date.

If it was a loan this would count as an existing debt and impact affordability according to the lender’s calculations.

When you might need a concessionary purchase mortgage

There are a few different circumstances where you might find yourself eligible for this type of borrowing, and lender appetite varies accordingly.

Some scenarios are seen as far riskier by lenders and are therefore less common or have higher expectations attached in terms of deposits required and rates available.

Buying from a family member

By far the most common scenario for a concessionary purchase mortgage is a sale between family members.

Most lenders prefer this to be close family – parents, grandparents, siblings or children – but some may be happy to consider extended family such as aunts and uncles, or occasionally even friends, although this is much less common.

This type of concessionary purchase is the one that lenders feel the happiest about because the motivation behind the discount is very clear – it’s a family member wanting to help.

The added benefits for you here are that you get to keep a cherished property within the family.

Buying from a landlord

Existing tenants looking to buy their rental home might be able to negotiate a discount if their landlord is keen to avoid the hassle and cost of trying to sell elsewhere.

Lenders normally set a few restrictions in this instance, typically:

• A discount of no more than 10%
• Borrower to contribute at least a 5% deposit of their own
• Borrower to have lived in the property for at least a year

Buying from an employer

Occasionally an employer may want to offer an employee a property at a discounted rate, although we’re starting to move towards the end of the spectrum where lenders are more suspicious about the motives behind a discount and so less keen to make a loan.

In this case the seller would normally be expected to sign a waiver of rights to confirm that the discount is a gift and has no conditions attached.

Buying from a developer

While there may be circumstances where a developer wants to offer a discount – if they need a quick sale for cash flow reasons for example – again lenders will view these transactions with caution, worrying that the discount might reflect undisclosed problems with the property.

Because of the perceived higher risk, there are far fewer lenders willing to agree to a developer discount mortgage and the amount of deposit required from the borrower and the typical interest rates are likely to be higher than if it was a family sale.

Buying on the open market

Very rarely you might be able to get a concessionary purchase mortgage on the open market where the buyer wants a quick sale.

Again though, this represents a high risk to lenders, who will be very wary of why the property is being sold cheaply, and so you should expect to be asked to pay a higher deposit of your own and possibly a higher rate of interest.

How a broker can help

Using a broker who has expertise in concessionary purchase mortgages is invaluable when it comes to negotiating the wide range of lender appetites and criteria, as they can look at your individual circumstances, draw on their expert knowledge and hand-pick the most relevant lenders.

A broker can also help to secure the best interest rates and guide you through any specific eligibility requirements associated with this type of loan, saving you money and unnecessary stress.

If you get in touch we can arrange for an advisor we work with, who has experience in this area, to contact you directly.

Eligibility criteria

The process for applying for and securing a concessionary purchase mortgage is similar to a standard mortgage, there may just be extra scrutiny around the discount, market value and the motivation behind it, especially if it’s a non-family sale.

A lender will assess your application and set deposit requirements and rates based on:

• The level of discount being offered as a percentage of the market value
• Your income and existing debt levels i.e. how much they feel you can afford to borrow
• Your credit history
• Whether or not you are contributing some deposit of your own and how much
• The condition of the property

Which lenders offer these mortgages?

Most lenders offer concessionary purchase mortgages when the current owner is related to the applicant. At the time of writing, only a few mortgage providers – including Kensington Mortgages and Scottish Building Society – will outright decline under these circumstances.

The lenders who have no problem with this, do however, have occasional caveats that might affect your borrowing prospects.

Below you will find a few examples of this…

• TSB state that the discount must be no more than 10%
• Barclays will decline outright if the applicant is buying from a dependent relative who is planning to remain in the property afterwards
• Pepper Money will only lend if the borrower has 15% deposit from their own funds
• Virgin Money will only lend if the applicant is buying from an immediate family member, such as a parent, sibling and grandparent.

The interest rates that these lenders offer vary from one to the next and can change at any time, especially if the market conditions are volatile.

Concessionary purchase mortgage rates aren’t usually any higher than they are for standard residential mortgage rates, although some lenders might increase them slightly if you’re buying from a developer or on the open market.

Approaching a lender directly is not recommended.

Firstly, you might run into some of the above restrictions if you were to go it alone, but more importantly, you’re far less likely to get the best deal if you limit yourself to just one mortgage provider’s range of products.

Things to consider

While concessionary purchase mortgages come with plenty of pros for borrowers, there are a few factors to consider before you sign.

A broker can help you navigate any of these to make sure you choose a product that fits your circumstances.

Vacant possession requirements

Most lenders will not allow a family member who has sold you a property at a discount to remain living there after the purchase is complete.

Occasionally it’s allowed if the family member is prepared to sign a waiver of rights, but be aware before you start as to whether you’re going to leave anyone in a vulnerable position.

It’s worth noting too that there may be additional terms attached, such as not being permitted to build an annex on the property for your family members after they’ve left.

Inheritance tax

If you’re buying from a parent or grandparent, the gifted discount could be eligible for inheritance tax if the seller were to die within seven years following the sale.

Inheritance tax is due at 40% if the gift has been made within three years of the donor’s death, and then on a sliding scale basis called taper relief, dropping eight percentage points a year until reaching 0% at year seven.

Stamp duty

Here’s some good news though – stamp duty is calculated based on the discounted sale price of the property, not the market value price.

First-time buyers in England and Northern Ireland do not currently pay stamp duty on properties under £425,000, but if the property you’re buying has a market value higher than this, or it’s not your first purchase, then the discount may save you extra money.

Use our calculator below to work out how much stamp duty you will need to pay.

Get matched with a broker specialising in concessionary purchase mortgages

Getting a concessionary purchase mortgage can be a great way for first-time buyers to get on the property ladder, but it doesn’t come without its complications.

To help make the process as smooth as possible you’ll want the support of a broker who specialises in this type of borrowing, as they’ll have the expertise and contacts to secure you the best deal.

Use our free broker-matching service and we’ll match you with a mortgage broker suited to your needs and circumstances.

Give us a call on 0808 189 0463 or make an enquiry and we’ll set up a free, no-obligation chat today.