Almas Uddin
Founder and Mortgage Advisor
30 Apr 2024
Buying a home can feel out of reach for many. Concessionary mortgages offer a unique solution, making homeownership more accessible. Today's post explores the good and bad sides of these special mortgage deals.
Keep reading to learn if it’s the right choice for you!
Key Takeaways
- Concessionary mortgages let buyers purchase homes below market value, often without needing a traditional deposit. This makes getting on the property ladder easier for many.
- Sellers, particularly family members, can pass property to loved ones at a discounted price, simplifying the process of transferring assets while potentially saving on taxes.
- There are various types of concessionary mortgages available, including deals from family or friends, rental properties from landlords, employer-based programs, and housing developer offers. Each addresses different buyer needs but shares the goal of making home buying more achievable.
- Exploring alternatives to concessionary mortgages, such as traditional loans or family-gifted deposits, can offer other paths to homeownership for those who find that concessionary purchases don't fit their situation.
What are Concessionary Mortgages?
A concessionary mortgage happens when you get a home loan under special terms, usually with help from someone who wants to support you financially. This can involve buying a house below its market value from family or an employer, making it easier for you to become a homeowner.
Definition
Concessionary mortgages provide a path for individuals to buy a property at a price lower than its standard market value or the full market value. This type of mortgage takes advantage of the discounted equity in the property, which serves as part or all of the buyer's deposit.
By using this method, buyers often achieve a lower loan-to-value (LTV) ratio, enhancing their affordability for home loans.
Often arranged between family members, concessionary purchase mortgages are designed to help relatives secure their first step onto the property ladder. These arrangements enable purchasers to obtain homes with discounts ranging from 5% up to 100% off the property’s listed market price, making it an appealing option for both parties involved in the sale.
Types of Concessionary Mortgages (purchase from family or friends, rental property, employer, housing developer)
Now that we've covered what a concessionary purchase is, let's explore the various types of concessionary mortgages available. These special arrangements enable buyers to secure homes under more favorable terms, often without a hefty deposit. Here are the different forms they can take.
- Purchase from family or friends: This type happens when a family member or a friend sells you their property below its market value. They do this to help you get onto the property ladder, making homeownership more accessible.
- Rental property: Sometimes, landlords offer their tenants the opportunity to buy the rental property they're living in at a discounted rate. This arrangement benefits both parties; tenants step into homeownership, while landlords sell without the hassle of putting the property on the market.
- Employer-based programs: Certain employers offer concessionary mortgages as part of their benefits package. This method assists employees in buying a home near their workplace at a lower cost, fostering loyalty and reducing commute times.
- Deals with housing developers: Housing developers occasionally sell properties at reduced prices through concessionary mortgage deals. They might do this to quickly sell off remaining units in development or as part of community investment initiatives.
Each type of concessionary mortgage addresses different needs but shares the common goal of making home buying more achievable for people who might otherwise struggle to save for a traditional deposit.
Pros and Cons of Concessionary Mortgage
Exploring the pros and cons of concessionary mortgages reveals a mix of benefits and challenges. Buyers can gain from lower prices, while sellers enjoy quick sales, yet tax implications may vary.
Benefits for buyers
Buyers enjoy significant financial advantages with concessionary mortgages, such as the ability to purchase a home at below market value. This unique benefit means they don't need a traditional deposit because the discount from the property's sale price acts as one.
Securing a property becomes more accessible and less stressful, opening doors for many to step onto the property ladder who might not have been able to otherwise.
By achieving a lower loan-to-value (LTV) ratio by combining the discount and any available deposit, buyers unlock access to better mortgage deals. These favorable terms can lead to substantial savings over time through reduced interest rates and monthly payments.
Concessionary purchase mortgages pave the way for acquiring valuable assets within families or securing homes directly from employers or landlords at attractive prices.
Concessionary purchases offer an alternative route into homeownership with unique benefits.
Next, let's explore how sellers gain from these transactions.
Benefits for sellers
While buyers enjoy specific advantages from concessionary mortgages, sellers also find valuable benefits in offering these types of deals. Sellers get the chance to keep property assets within the family by selling at a discounted price through a concessionary purchase.
This method allows them to pass on assets more smoothly and affordably than traditional sales might permit.
Offering a property through a concessionary mortgage can lead to attractive mortgage deals that benefit both parties involved. For sellers wishing to sell their property below market value to someone close, this type of sale can reduce the stamp duty land tax payable.
It simplifies the process for those wanting to facilitate home ownership for family members or close individuals, making it an appealing option for many looking to help others step onto the property ladder while also securing their own financial or familial interests.
Tax implications
Moving from the benefits sellers enjoy, it's crucial to understand how concessionary mortgages affect taxes. A property below market value purchase can trigger tax liabilities. For example, stamp duty land tax applies at various levels depending on whether you're purchasing your primary residence or an investment property.
The rate increases with the price of the home.
Selling a property at a discount may lead to capital gains tax if there's profit involved, which depends on the seller's income and what they sold. Furthermore, if a home is bought under its market value as part of a concessionary purchase in the UK, this could be viewed as receiving a gift. Some mortgage lenders will require you to treat a discount as a gift and state the full market price in the contract so you need to pay stamp duty on the figure.
In such cases, inheritance tax might need consideration if the seller passes away within seven years after the sale. Taxes play a significant role in these transactions and influence both parties' financial responsibilities.
Alternatives to Concessionary Mortgages
Exploring other paths can offer new possibilities for homebuyers. Traditional mortgages and family gifted deposits present different benefits worth considering.
Family gifted deposits
Family gifted deposits offer a straightforward way for relatives to help with the purchase of a home. A family member directly gives a sum of money to be used as part of the down payment on the property.
This generous act does not alter the property's value, unlike concessionary purchases where the sale price might be reduced for family benefit.
Such gifts are crucial for many buyers who struggle to save enough funds for their home's initial deposit. They make it easier to secure a mortgage since mortgage lenders often require lower loan-to-value ratios when a substantial deposit is involved.
This method stands out as an excellent alternative to concessionary mortgages, providing financial aid without complicating the buying process with additional tax implications or valuation adjustments.
How to Get a Concessionary Mortgage
The journey to secure a concessionary mortgage begins by teaming up with a specialist mortgage broker who understands your unique situation. They'll guide you through gathering all the necessary documents and walk you through each step of the application process, ensuring everything runs smoothly.
Finding a specialist mortgage broker
Working with a specialist mortgage broker boosts your chance of securing a concessionary purchase mortgage. These mortgage brokers understand the unique criteria different lenders have for these loans.
They dedicate their expertise to matching you with a lender that fits your specific needs, making the complex process smoother before they offer concessionary purchase mortgages.
Brokers save you time by handling much of the legwork involved in finding a suitable concessionary mortgage provider. Their knowledge and connections can be invaluable, especially since finding the right lender for a concessionary purchase can be challenging.
With their assistance, navigating through the options becomes more straightforward, ensuring you find a deal that suits your situation perfectly.
The process of obtaining a concessionary mortgage
First, find a specialist mortgage broker who understands the ins and outs of concessionary purchase mortgages. This professional will guide you through the unique aspects of these loans, especially since they differ from traditional mortgages.
They can also help identify if your situation qualifies for a discount on property value from family members, landlords, or employers.
Next, gather all necessary paperwork which usually includes proof of income, identification documents, and details about the property you wish to buy. Your broker then works with you to submit an application that highlights how the discount on the open market value serves as your deposit.
Since discounts can range from 5% up to 100%, this stage is crucial in demonstrating how the discounted purchase price meets lending criteria.
Conclusion
Concessionary mortgages offer a unique path for homebuyers, especially those struggling to save for a large deposit. These mortgages can make the dream of homeownership more attainable by leveraging discounts offered by family members or other closely related sellers.
Buyers enjoy lower upfront costs and the potential for better mortgage rates due to the built-in equity. On the flip side, sellers can ensure their property remains within the family, reducing complexities associated with traditional market sales.
As with any financial decision, weighing both advantages and disadvantages helps in making an informed choice that aligns with one's long-term goals and financial situation.
FAQs
1. What is a concessionary purchase?
A concessionary purchase happens when you buy a house at a lower price than its market value, often from a family member.
2. How does a concessionary mortgage work in the UK?
In the UK, a concessionary mortgage helps buyers finance their homes when they get them at reduced prices through concessionary purchases.
3. Can I use a calculator to figure out my payments for a concessionary mortgage?
Yes, you can use a concessionary mortgage calculator to estimate your monthly payments and understand how much you need to pay back.
4. What does "concessionary purchase" mean for me as a buyer?
As a buyer, "concessionary purchase" means you're getting your home for less than it's worth on the market, which could make your mortgage cheaper
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