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Concessionary Mortgages | What You Should Know
We all know that buying a property - especially your first property - can be extremely difficult. While high loan-to-value (LTV) mortgages exist to help first-time buyers, it does often mean accepting a higher mortgage interest rate and you still have to find a sizeable deposit.
But what is a concessionary mortgage and how can it help? At Clifton Private Finance, we have the answers.
And to speak to an adviser about your situation, please get in touch.
How a Concessionary Mortgage Works
Understanding Loan-to-Value and Deposits
One of the core parts of the mortgage system is the LTV, or loan-to-value, portion of the mortgage. This is a percentage figure that shows how much of the total value of the property is represented by the loan.
A high LTV means that the mortgage provider is lending you the majority of the money to buy the house, while a lower LTV means that you are investing more of your own capital as a deposit.
The higher the LTV, the greater a stake the mortgage lender has in the property, and the more risky the proposition is for them.
This is because if everything goes wrong and they have to repossess and sell the house to get their money back, it’s a lot harder to make sure a quick property sale gets back their 90% (plus any interest) than it is if they only need to cover 70% (again, plus interest).
Because part of the buying process is saving up for the deposit, most first time buyers have to accept the higher rates of a larger LTV loan; while some buyers struggle to meet that minimum investment requirement at all, effectively shutting them off from being able to purchase a property.
Lowering LTV by Leveraging Equity
LTV, remember, is calculated as the percentage of the property market value that the mortgage represents.
At first glance, this very idea seems ridiculous - after all, who is going to sell you a property for less than it is worth? But in truth there are opportunities for this for example:
- When parents are looking to help you get on the property ladder by selling you a house they already own for a discount.
- When your current landlord is willing to sell you the house you are renting at a lower price to avoid the complications of a long selling process.
- When employment schemes are in place by your work to provide work-related housing at a concession.
- When a developer is looking to offer a markdown on some of their properties to early buyers.
- When the seller has their own personal reason to sell the property to you quickly at less than market value.
When you have the option to buy a property at a concessionary price, the difference in its market price and its sale price to you can provide the required equity to mitigate the need for a deposit, either entirely or in part.
Any deposit that is then added can also help to further lower the LTV rate, bringing the benefits of improved mortgage rates and terms as described earlier.
The Concessionary Mortgage
A concessionary mortgage is a specific type of mortgage that has been developed for this particular situation.
It is a product offered by a bank or specialist mortgage lender that allows the use of a discounted sale price as equity in the property in place of (or in addition to) a standard deposit.
Obtaining a Concessionary Mortgage
Getting a concessionary mortgage is a little different to a standard mortgage.
It’s not a product all mortgage lenders offer, so you may need to approach a specialist lender. It’s also subject to some additional checks regarding the reason for the concession.
It’s still really important that you go through all the standard risk-assessment and due diligence processes of a normal mortgage.
The mortgage provider will want to undertake thorough valuations and surveys to make sure that there isn’t anything wrong with the property as a hidden reason for the discount (something you should want to personally know as well).
In all other ways, the process for obtaining a concessionary mortgage is the same as any other mortgage application and includes the same level of credit checks and affordability tests - your lender will still want to be sure you can afford the repayments.
The Advantages of a Concessionary Mortgage
Being able to get a home at a discount obviously has many advantages. Purchasing a property with a concessionary mortgage can:
- Offer superior mortgage rates thanks to the lower risk and lower LTV of the mortgage.
- Allow you to purchase a property without saving for a deposit.
- Be a far easier exchange than with a standard property purchase with a stranger - knowing the seller means a much smaller chance of being gazumped or facing other problems.
- Increase confidence in the property as it’s already potentially well-known to you.
- Potentially means you get to own a property with which you already have a prior emotional connection (which is always nice).
6 Considerations When Getting a Concessionary Mortgage
There are always several complications that you have to think of when buying a house, and while a concessionary mortgage and below value purchase can remove some of these, it does come with a few of its own.
The Undervalue / Early Resell Clause
The undervalue, or early resell clause, is commonly placed on a concessionary mortgage by the lender. This prevents the new owners from immediately reselling the property (known as ‘flipping’ the property) for instant profit. Early resell clauses are usually for six or twelve months.
Clawback Clause
An addition to the undervalue clause, a clawback clause entitles the original seller to reclaim some (or all) of the concession if the property is resold for profit during a set timeframe. This is another way to prevent unreasonable property flipping.
The Impact of Capital Gains Tax (CGT)
The seller of a property may have to pay capital gains tax for the profit they made on the transaction. If this isn’t thought about in advance and factored into the discounted price for the property, it can come as a shock which may end up actually costing the seller more than they expected - not a very positive experience when they are already helping out in a huge way.
It’s important that the amount of CGT is properly calculated well before the deal is finalised so that, if necessary, it can be factored into the amount of discounting offered.
Note that CGT is not applicable to properties sold that are the primary residence.
The Looming Worry of Inheritance Tax (IHT)
Under inheritance law, any significant financial gift from parents to their children (or indeed, other family members) can be subject to inheritance tax if fewer than seven years have passed before the original owners pass away. This can add a considerable and unexpected bill to an already upsetting time. If the sellers of the property are family and are in their later years or in poor health, it may be advisable to set aside a portion of money to cover any inheritance tax bill that may happen in the first seven years after purchase.
This saved amount can be released back should it not be used once this time threshold for inheritance tax gifts has passed.
Additional Agreements
The seller may want to add additional clauses to the contract of sale that includes some limitations - including potential extensions to the early resell clause.
These additional agreements may cause ongoing conflict between the two parties if, at a later date, something that was agreed upon is considered unfair. Remember, circumstances do change and contractual obligations can make options extremely limited.
Consider, as an example, a couple who purchases a concessionary property early in their marriage from the husband’s parents under agreement that it must remain as the family home for the first ten years. Should their marriage deteriorate in that time, the wife may find herself financially strangled and unable to move out of the property as part of a separation due to the contract limitations, potentially made even worse if children are involved. Having to go to her in-laws and effectively beg them to let her out of her obligations can add additional strain to an already difficult situation.
Undertaking additional agreements such as this should only be done with legal assistance and full understanding of the implications.
The Feeling of Debt
Quite aside from any legal obligations or contractual clauses, some people will forever feel that they are somehow in debt to their benefactor. This can lead to poorer future decisions, such as remaining in a job for longer than otherwise due to a feeling of responsibility to the company that provided a concessionary home.
For some people, a concessionary mortgage doesn’t quite feel that they’ve earned the full right to their home which can have unwanted and unnecessary long-term impact.
Concessionary Mortgage Examples
Example One - Family Help
Simon and Mary are looking to downsize from their £450,000 family home which they have lived in for 30 years as they brought up their family.
They have their sights set on a smaller country cottage that is on the market at only £300,000. Their eldest son and his family have been renting for a long time and are desperate to get a property of their own.
They are not really looking to squeeze more out of the property, especially as it was purchased for significantly less three decades earlier and the mortgage has long been paid off.
Their son and his wife apply for a concessionary mortgage for the full amount of £375,000 which represents a LTV of 83.33%.
After undertaking credit checks and affordability stress tests, the mortgage is approved without the need for any additional deposit and the property changes hands. Simon and Mary use their money to buy their new cottage as planned.
Example Two - Landlord and Capital Gains Tax
Heather has been renting her two-bedroom flat for three years. The landlord is finding the management and maintenance of the property more difficult than they anticipated and wants out of the whole situation. The property is valued at £200,000 and has a current buy-to-let mortgage outstanding on it of £160,000.
They discuss the situation and Heather brings up the potential problem of capital gains tax. After some research, her landlord realises he will have to pay some and asks her to increase the price to cover this too. They calculate that CGT will be 28% of £34,000 (calculated as £40,000 capital gains, less £6,000 allowance), which equals £9,520. They round this up to £10,000.
Heather applies for a concessionary mortgage of 90% LTV but finds she can’t get the full amount. She is offered a 88% LTV mortgage of £176,000 and agrees to this, able to add £4,000 of her own savings as a deposit to cover the difference.
She pays her landlord the desired £180,000 (£176,000 from the mortgage, £4,000 from her savings). He immediatly clears his outstanding buy-to-let mortgage, pays the CGT bill of £9,520 and walks away happily with £10,480 profit.
How to Apply
If you are being offered a property at a discount, why not give us a call? We can help you get the concessionary mortgage you need to secure the property with the most beneficial rates and flexible terms.
Our expert mortgage team can work with you and your seller to advise you on the intricacies of concessionary mortgage and make sure the whole process is undertaken smoothly.
Contact Clifton Private Finance today.
