A LITTLE-KNOWN mortgage could help renters to buy their first home with no need for a deposit.
A concessionary purchase mortgage allows wannabe homeowners to bag a property for less than the market value.
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It’s sometimes known as a below-market-value (BMW) purchase.
This type of mortgage means a tenant can buy the property they are already living in.
The landlord offers a discount equivalent to the amount that a first–time buyer would typically put down as a deposit.
For example, a buyer could get a concessionary mortgage of £90,000 on a house worth £100,000 if the owner reduced the price by 10%, or £10,000.
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With a typical mortgage, first-time buyers would need to have saved this amount to put down as a deposit.
Plus, mortgage rates are no higher than on a standard purchase mortgage.
While it may seem counter-intuitive for landlords to do this, it can help them to make a quicker sale than having to go through the open-market.
They also save on the associated costs, like advertising the property, estate agents and the risk of having an empty property if a tenant leaves before a buyer is found.
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Lenders which offer concessionary mortgages include Nationwide, Halifax, Barclays and Leeds Building Society.
For tenants looking to get on the housing ladder, it can also be an attractive option in the face of soaring rental costs which makes it hard to save for a home deposit.
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The average asking rents hit new record highs in the final quarter of 2023, according to property website Rightmove.
Outside of London, the average monthly rent reached a high of £1,280 per month while in London, it hit an eye-watering high of £2,631, on average.
You apply for a concessionary mortgage in the same way that you would any other, and you need to consider things like affordability.
This includes your earnings, how much you spend a month and the deposit you have put down on the property you’re purchasing.
The Sun has on how to apply for a mortgage and boost your chances of getting accepted.
Below we explain the pros and cons of concessionary mortgages.
What are the benefits of a concessionary mortgage?
You don’t need a deposit
The main draw of a concessionary mortgage is that you won’t need a deposit.
Karen Noye, a mortgage expert at Quilter, said: “The discounted price can be used as the deposit or towards the deposit so the difference in the price agreed and the full market value can cover the deposit required.
“In some cases, depending on the borrower’s situation and finances, they may not need to provide any form of deposit themselves.”
Some lenders will accept concessionary purchases, but require the buyer to put in a minimum five or 10% deposit from their own funds.
Lenders will either base the loan-to-value of your mortgage off the market price, or the below market purchase price – this is the price of the home with the discount.
Mortgage expert Nick said: “If they use the market price, then you’ll start off with more equity in the property.
“This will give you a lower LTV , which will give you access to better rates.
“If they use the purchase price, you won’t benefit from a lower LTV and lower rates, but you’ll still be buying a house for less than market value.”
Less stress
Buying a house is notoriously stressful, so buying from your landlord – someone you already know – can help make the process easier.
Mortgage expert Karen said: “Buying from your landlord means you already know the property and the area, and if you have done work to the property or decorated then you will benefit from the money spent.
“What’s more, you will not need to worry about moving or finding another property which can alleviate a lot of stress.
“It can also reduce overall moving costs and fees incurred, such as removals or putting a deposit down on a new rental property.”
With the average cost of packing, furniture dismantling and delivery coming in at £1,000, you could save a small fortune.
What are the cons of a concessionary mortgage?
They’re not available from all lenders
Not all lenders will allow concessionary mortgages, which means there might not be a huge amount of choice on offer.
Karen said: “The discount may also have to be at a certain level in order to meet their lending criteria.
“Additionally, some may require that the borrower needs to also provide a personal deposit on top of the equity gift.”
For example, Nationwide and Halifax require a discount of at least 10%.
Some lenders will accept concessionary purchases, but require the buyer to put in a minimum five or 10% deposit from their own funds.
There could be problems with the property
Even if you live in the property, it’s a good idea to get a suitable survey done before buying in case there are any potentially costly defects.
Nick Mendes said: “A property could be sold under market value due to problems or issues with it, which may involve extensive and expensive repair works.
“It’s important to consider the type of survey required if you suspect that the property may have hidden issues that may evade a basic property assessment.”
A house survey can cost between £400 to £1,500, according to the HomeOwners Alliance.
While this may seem pricey, it could save you a huge repairs bill later down the line.
Other first-time buyer schemes where you need a small, or zero deposit
Several big banks and building societies allow first-time buyers to borrow the full amount it costs to buy their home.
These deals are often referred to as 100% loan-to-value mortgages – because you don’t need any deposit to buy.
Last year, Skipton Building Society launched its Track Record 100% mortgage available to renters who were buying their first ever property.
The only catch is that the amount you can borrow is capped as your monthly repayment cannot be more than you currently pay in rent.
Property developer Fairview recently launched its Save to Buy scheme.
This allows first-time buyers to save for their final deposit after moving into their new home.
Buyers pay a fixed monthly sum into a savings pot held by Fairview instead of rent.
You only need a 1% deposit to get started and when you’ve built up enough equity you can apply for a mortgage to buy your home.
The Right to Buy scheme lets council house tenants buy the property they rent at a discount of up to 70%.
You get a 35% discount on your council home if you’ve been a public sector tenant for between three to five years.
The Right to Acquire is similar to Right to Buy but allows people renting from a housing association or other public sector landlord to buy their home.
It’s open to anyone renting in the public sector for three years or longer and offers a discount between £9,000 and £16,000 on the purchase price.
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How much you get off will depend on the location of the property.
Meanwhile, a little-known scheme gives first-time buyers up to £16,000 discounts on their homes – can you apply?
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