A property may be advertised as worth £250,000 but available to purchase for £200,000. The buyer may naturally assume that the £50,000 difference counts as an immediate deposit.
Mortgage lenders do not always view the transaction that way.
The figure used can depend on the lender, the relationship between buyer and seller, the reason for the discount and whether the difference represents a genuine gift of equity. Establishing the lender’s approach before committing to the purchase is essential.
Purchase price and market value are different
The purchase price is the amount the buyer has agreed to pay. The market value is the valuer’s opinion of what the property is worth in the open market at the valuation date.
An estate-agent appraisal, seller’s expectation or online estimate does not establish the figure a mortgage lender will accept. The lender normally commissions its own valuation to decide whether the property provides suitable security.
If the valuer reports £250,000, this does not automatically mean the lender will calculate the mortgage using £250,000. Many standard mortgage calculations are based on the lower of the purchase price and lender valuation.
How the lower figure can affect the mortgage
Suppose a landlord agrees to buy a rental property for £200,000. It is described as having a market value of £250,000, and the landlord wants a mortgage at 75% loan-to-value.
If the lender calculates the mortgage from the £200,000 purchase price, the maximum loan at 75% would be £150,000. The buyer would need to provide £50,000, plus purchasing costs.
If a suitable lender accepts the £50,000 reduction as gifted equity and calculates the loan against a £250,000 valuation, the position could be different. A £150,000 mortgage would represent 60% of the valuation.
That second calculation should never be assumed. The lender must specifically accept the transaction and the proposed source of equity.
What is a concessionary purchase?
A concessionary purchase occurs when the property is sold below market value and the difference is intentionally provided for the buyer’s benefit.
This is often associated with a sale between family members. It can also arise when a landlord sells to an existing tenant or an employer sells accommodation to an employee, although lender acceptance varies significantly.
The lender may want to know:
- Why the property is being sold below market value
- How the buyer and seller are connected
- Whether the discount is a genuine gift
- Whether any part must be repaid
- Whether the seller will retain an interest in the property
- Whether another loan or charge is involved
- How long the buyer has occupied the property
- Whether the transaction is at arm’s length
- Whether the solicitor is satisfied with the arrangement
Some lenders restrict concessionary purchases to particular relationships. Others may accept a wider range of transactions but impose a maximum loan-to-value or require the buyer to contribute some money personally.
Gifted equity is not the same as a cash deposit
With a normal cash deposit, the buyer provides money towards the agreed purchase price.
Gifted equity is the value represented by the seller accepting less than the property’s market value. No money necessarily changes hands for that element of the transaction.
For example, a parent may sell a property valued at £250,000 to an adult child for £200,000. The £50,000 difference could potentially be treated as gifted equity by a lender that accepts this arrangement.
The lender and solicitor will usually require clear documentation confirming that the gift is unconditional, does not need to be repaid and does not give the seller continuing rights over the property.
A private arrangement requiring later repayment is not a genuine gift and must be disclosed.
A discounted price may simply be the market price
The phrase “below market value” is frequently used in property marketing, but a discount from an asking price does not necessarily create equity.
The property may be cheaper because of:
- Significant repairs or refurbishment
- A short lease
- Sitting tenants
- An unusual construction type
- Planning or licensing problems
- Restricted mortgageability
- A quick completion requirement
- Limited local demand
- An optimistic original asking price
If a property has been openly marketed and the best available offer is £200,000, the lender’s valuer may conclude that £200,000 reflects its current market value.
A promised valuation should not be used as the foundation of the finance plan.
What if the lender’s valuation is lower?
Imagine the buyer agrees to pay £200,000 expecting a valuation of £250,000, but the lender’s valuer reports £185,000.
The lender may calculate the maximum mortgage from £185,000 because it is lower than the purchase price. At 75% loan-to-value, that would produce a maximum loan of £138,750.
The buyer would then need £61,250 to complete the £200,000 purchase, before fees and taxes.
This demonstrates why a transaction that appears to require little cash can create a substantial funding gap once the independent valuation is received.
Connected transactions require extra care
Purchases involving relatives, company directors, shareholders, business partners or transfers between an individual and a limited company can have additional legal and tax consequences.
Property transaction tax and Capital Gains Tax are not always calculated simply from the cash price shown in the contract. In certain connected transactions, market-value rules may apply.
The position also differs across England, Northern Ireland, Scotland and Wales because different property transaction taxes operate.
Independent legal and tax advice should be obtained before deciding how the transaction will be structured. The mortgage application must accurately disclose the relationship between all parties.
Buy-to-let rent still has to support the mortgage
A substantial apparent discount does not remove the buy-to-let rental assessment.
The lender may apply an Interest Coverage Ratio and stressed interest rate to the valuer’s confirmed market rent. If the rent does not support the requested mortgage, the loan may be reduced even when the loan-to-value appears low.
Limited-company applicants and portfolio landlords may also face additional checks involving company structure, personal guarantees, existing properties, rents and mortgage balances.
Prepare the complete case before making an offer
Before proceeding with a below-market-value purchase, establish:
- The genuine agreed purchase price.
- Why the seller is accepting less.
- Whether the discount is a gift or must be repaid.
- The relationship between buyer and seller.
- Which figure the proposed lender will use.
- How the deposit and equity will be evidenced.
- Whether the expected rent supports the mortgage.
- The legal and tax consequences of the transaction.
NetRent Mortgage Solutions works with DNA Financial Solutions to help landlords and buyers explore standard purchases, concessionary transactions, limited-company mortgages and specialist property finance.
To discuss a proposed below-market-value purchase before committing, contact NetRent:
Telephone: 01352 721300
Email: mortgages@netrent.co.uk
NetRent does not provide legal advice. This article represents our general understanding of the landlord mortgage and rental property market and is provided for information only.
Mortgage products, valuations, loan-to-value limits and lender criteria can change. Tax treatment depends on individual circumstances and location. Appropriate mortgage, valuation, legal and tax advice should be obtained before proceeding.