Concessionary mortgages explained

Concessionary purchases can allow people to sell a property at a discounted price, helping someone (usually a family member) get onto the property ladder and may even be considered without the need for a deposit.

In this article, we explain how a concessionary mortgage works, the tax implications of buying and selling using a concessionary mortgage as well as how it differs from a gifted deposit mortgage. We also list the pros and cons to help you weigh up the advantages and disadvantages of concessionary purchases.

What is a concessionary purchase mortgage?

A concessionary purchase mortgage allows you to buy a property for less than it is worth and is sometimes referred to as a below-market-value (BMV) purchase. This type of property purchase relies on the vendor (seller) providing the purchaser with a discount on the actual value of the property. The discount is considered a gift with the equity within the property being passed onto the buyer.

Although the gifted equity within the property can act as the deposit when you arrange your concessionary purchase mortgage, it is also possible to contribute a deposit amount to increase the loan-to-value even further. Some lenders may even require this and we explain this later in the article.

How does a concessionary purchase mortgage work?

A concessionary mortgage supports a concessionary purchase where you buy a discounted property and the discount acts as the deposit on the mortgage loan. In essence, the lender will provide you with 100% of the funds needed to buy the property because they are reassured by the fact that the property has sufficient equity to act as the deposit. Some lenders may require a deposit contribution in addition, despite the fact that the discount value is often seen by others as the deposit on the property.

The discount must be a gift. If the discount is considered a loan to the buyer or if the seller maintains any kind of ownership of the property, it cannot be considered a concessionary purchase.

Concessionary purchase mortgages can be very attractive to buyers without a deposit. Families could even use a concessionary purchase as a way to keep property assets within the family.

Concessionary mortgages are most commonly arranged by family, most commonly grandparents or parents offering children or grandchildren a helping hand onto the property ladder by selling them the property at below-market value. Those who have some money saved up towards a deposit could even use a concessionary mortgage to combine the deposit and the discount value to give a lower loan-to-value (LTV) ratio. A lower LTV means that they own more of the property and could mean that they attract better mortgage deals, as interest rates are generally more attractive if the LTV ratio is low.

As with all mortgage deals, borrowers will still have to meet the lender's affordability criteria which may include limitations based on income multiples used to justify the repayment amount. Credit checks will normally form part of the qualification process when you apply for a concessionary mortgage and as such you should check your credit history before completing an application. Some lenders can be more lenient than others.

Concessionary purchase example

Property value	£250,000
Discounted property price	£200,000
Discount / Equity	£50,000
Mortgage value	£200,000
Mortgage LTV	80%
Deposit required^	£0

^ some lenders still require a deposit contribution from the buyer

Is there a limit to the discount amount for a concessionary mortgage?

Discounts can vary between 5% of the property's market value up to any amount - at 100% there would be no need for a mortgage because this would be a transfer of equity and not a purchase. Some lenders may offer a concessionary mortgage at 95% LTV while others will only lend at a 90% LTV or lower.

Buying a house from a friend or family member

If a member of your family or a friend offers to sell you their property at a discount, you can arrange a concessionary mortgage to fund the purchase. You will have to bear in mind that the seller cannot maintain ownership of the discounted part of the property and the discount cannot be considered a loan that you will repay at a later date. A concessionary mortgage lender may allow the seller to continue living in the property, however, not all lenders will allow this, so you may need to speak with a mortgage specialist* if this is your wish.

Buying your rental house from your landlord

Your landlord may wish to sell the property that you occupy as a tenant and may suggest that you buy the property at a discount and carry on living in it. Landlords may do this because they have built up a relationship with you over the course of the tenancy and also, may not wish to go through the hassle and cost of selling in the open market. Some mortgage lenders will not offer a concessionary mortgage to a tenant buying from their landlord if they have been renting the property for less than 12 months. As with all concessionary mortgages, the landlord cannot maintain a stake in the property or offer the property discount as part of a loan agreement.

Buying a property from your employer

It is a less likely circumstance but you may be offered to purchase a property owned by your employer at a discounted price. This type of concessionary purchase relies on written evidence to demonstrate that the employer no longer owns any equity within the property and that the discount is not a loan that will be repaid at a later date.

Concessionary purchases from a housing developer

You may find a property that is being offered at a discount by a property developer who is perhaps looking for a quick sale. If the market value exceeds the price you will pay, this can potentially be purchased using a concessionary purchase mortgage but the lender is likely to ask for reasons why the developer discount is being offered. Lenders can be hesitant to offer a concessionary purchase mortgage for a discounted new build property and may require a deposit from the buyer for reassurance.

What is the difference between a gifted deposit and a concessionary purchase?

A gifted deposit property purchase is one where you are gifted the money that you present as the deposit towards the purchase of a property. The gift does not change the value of your property and your mortgage contract will reflect the true market value of the property when you complete the purchase. On the other hand, a concessionary mortgage considers the discount value to be the deposit but the property value is the discounted property value.

What are the tax implications of a concessionary purchase?

It is important to understand the implications of paying below market value when it comes to how much stamp duty you will pay on a concessionary purchase. There may also be capital gains tax payable by the seller depending on whether the property was their main residence or not. If you buy the property from a family member, the discount that you receive through the reduction in the purchase price is treated as a gift and may be liable for inheritance tax. We explain each of these tax implications below.

How much is stamp duty on a concessionary purchase mortgage?

Stamp duty land tax is charged at different thresholds depending on whether you are a first-time buyer or not and whether the property will be your main residence. First-time buyers may pay less stamp duty due to higher thresholds before the tax is applicable. You can find information about the thresholds and rates of stamp duty charges in our article, "Everything you need to know about Stamp Duty".

One of the key things to note about stamp duty on a concessionary purchase mortgage is that the value of the property used to work out how much is payable is the discounted value. For example, if the property is worth a market value of £300,000 but you have purchased it at a concessionary value of £250,000, then you pay stamp duty on £250,000, meaning you may pay less stamp duty.

Capital gains tax payable for a concessionary purchase

Capital gains tax (CGT) is usually payable if you sell an asset and make a gain from the sale. There are various assets that fall into this category, however, some are exempt and this includes gains made from selling a property that is your primary residence. In some cases, the seller of the property may be liable to pay CGT and this will usually have to be paid within a designated period of time after the sale of the property completes. Importantly, CGT is usually payable on the market value of the property even if you sold it at a reduced price for a concessionary sale.

CGT is charged if the gain you make is over and above the tax-free annual exempt amount and is calculated based on your income tax band and the type of asset you made a gain on. You can read more about capital gains on the disposal of a property in the government article, 'Capital Gains Tax: what you pay it on, rates and allowances'.

Will I have to pay inheritance tax if my parents sell to me at below-market value

If you buy a property and the seller has sold to you at a discount, that discount constitutes a gift to you and as such falls into the category of a potentially exempt transfer. Potentially exempt transfers (PETs) are gifts that may be subject to an exemption from inheritance tax. Essentially, the person making the gift must survive at least 7 years in order for there to be no inheritance tax payable on the gift. Between the date the gift is made and 7 years, the tax amount tapers, reducing after the first 3 years and every year thereafter until 7 years are complete and the tax liability reduces to zero. Rules are different if the seller continues to live in the property (some lenders will allow this) as the discount may be considered a gift with reservation in this scenario. There are thresholds and rules for inheritance tax that apply before the tax is payable and you can read more information in the article, 'Work out Inheritance Tax due on gifts'.

Pros and cons of a concessionary mortgage

Concessionary purchases are more complicated than a conventional purchase and the situation requires a number of considerations on the part of the seller and the buyer. Your unique circumstances will determine the pros and cons of arranging a concessionary purchase and so it is important to speak with a mortgage specialist* to understand whether it is right for you. As a starting point, we have listed some of the pros and cons below that are worth weighing up.

Pros

• Help to get onto the property ladder
• Ability to pass on assets to family members
• Selling at below market value makes the purchase more affordable
• Zero consideration sale may be possible
• Potentially reduced stamp duty land tax to be paid

Cons

• There is a potential inheritance tax liability to be paid
• The concessionary sale may affect means-tested care in the future for the seller
• Some lenders may not allow sellers to continue to live in the property once sold

Alternatives to a concessionary mortgage

If your aim is to help a family member or tenant acquire your property in a financially favourable way, a concessionary purchase can do this very well but there are other options to explore including:

• A gifted deposit purchase mortgage - a purchase at full market value but with the aid of a deposit that has been gifted to the buyer
• A guarantor mortgage - a purchase at full market value where the mortgage is lent on the basis that a guarantor acts as a financial backup in case the buyer defaults on the payments

How to get a concessionary purchase mortgage

The best mortgage deals for concessionary purchase mortgages are usually offered to buyers purchasing at the lowest LTV ratios as there is a larger amount of equity covering the risk for the lender.

If you require a mortgage to support your concessionary purchase, you will naturally search for the best rates but it can be a complicated process as every lender will have a slightly different set of rules. It may be useful to contact a specialist mortgage broker who is qualified and can search the market for a mortgage deal to suit your needs.

You can search for a mortgage broker in your local area using Vouchedfor* - a service that vets financial professionals based on customers' experiences.

 

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