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Mortgage Advisor & Director
Buying a home from a friend or a family member
There are many different reasons why you may choose to buy from a friend or family member. You may be able to save money on peripheral costs, such as by avoiding estate agents’ fees or reducing solicitors' fees. Another benefit is that the vendor may choose to sell to you below market value. This is called a concessionary purchase, or below market value purchase (BMV).
What is a concessionary purchase?
A concessionary purchase is a purchase below market value.
A concessionary purchase is where an “imaginary” deposit is paid. The actual value of a property depends on the current housing market and will be defined by an estate agent. If a friend or family member chooses to sell below that value, they are effectively gifting you the difference. This gift then operates as a deposit, by reducing the amount you need to borrow from a lender, and reducing their risk.
Example:
- Your sibling's property is valued at £300,000
- They agree to sell to you for £250,000
- They are effectively gifting you £50,000
If you are putting down a deposit as normal and paying market value for the property, this would not be considered a concessionary purchase. In this case, it would not matter to the lender whether you are buying from a friend, a family member or a stranger.
What are the benefits of a concessionary purchase?
- You can buy without putting down a deposit*
- You will not have to bear the higher interest rates you would normally experience when applying for a mortgage with zero deposit
*Some lenders will still require a deposit, albeit lower, around 5-10%.
Can I buy a home from a family member, with them staying in the home?
In general, a concessionary purchase requires that the vendor move out.
This prevents the property from changing hands between occupants without any change to who lives there. If you are planning on buying property from family and effectively becoming their landlord, it’s best to speak with a mortgage advisor and a solicitor.
Can I buy from any friend or family member?
Some lenders will stipulate which relatives you can buy from when making a concessionary purchase. First degree relatives and grandparents are fine, but aunts and uncles, cousins or step-parents may limit which lenders are willing to consider your application.
If you are planning to pay market value with no element of gifting or reductions in price, you can treat the purchase as if you were buying from a stranger.
Are there any other implications of a concessionary purchase?
Bankruptcy
If the vendor becomes bankrupt in future, there are implications for undervaluing a property sale. The Court would appoint an Official Receiver to investigate debts, and in certain situations, they have the power to overturn an under-value transaction. Therefore, if the property is being sold to manage debts, it may be wise to pay market value to avoid any chance of this in future.
Inheritance Tax
If you are buying from parents, and they pass away within seven years, the amount that the property was undervalued at is eligible for inheritance tax. The amount to pay, if anything, depends on how much the person gave away in total during those seven years, and how much time has passed. If a person passes within three years of the property gift, any inheritance tax would be calculated at 40%. This tapers down to 8% when six years have passed, and to 0% after seven years.
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.
