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By Pete Mugleston | Mortgage Advisor

Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 4th December 2020*

Buying a property below market value using a mortgage

We receive lots of enquiries from people who have the opportunity of buying a house below market value and now wish to consider the mortgage options available to them.

Whether the property you’re looking to buy is owned by a relative or someone in financial difficulties who needs to release equity and clear their debt, hopefully, the information below will provide the answers you need.

In this article we will cover:

Once you’ve read the details here, make an enquiry so we can arrange for one of the expert advisors we work with to contact you directly and discuss your own personal situation.

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Can you get mortgages for property sold below market value?

Yes, it’s certainly possible. Buying property below market value is an acceptable practise, therefore, lenders will offer mortgages to individuals in these circumstances.

If you’re buying a house below market value from a relative, you can expect a lender to closely scrutinise your mortgage application. You will need to clarify to a lender the current market value (by checking values of properties recently sold in the immediate area) in addition to the price agreed.

Before you proceed with your purchase, make an enquiry with us and the specialist advisors we work with, who have the expertise in this field, can find the best mortgage deals for you.

These whole-of-market experts can offer bespoke advice on buying below market value and can introduce you to the lender best positioned to offer you favourable mortgage rates.

Concessionary purchase

Most lenders would class a house sale between family members at below market value as a concessionary purchase. There are a few lenders who, under these circumstances, may consider the difference between the market value and the agreed sale price as the deposit for the mortgage.

For example, the market value of your relative’s house is £250,000 and they agree to sell it to you for £187,500. The difference – £62,500 – equates to 25% of the market value.

What are the advantages of this?

The benefit for the buyer is the ability to secure 100% of the sale price as a no mortgage deposit.

Most lenders who offer mortgages in these circumstances usually only accept transactions between immediate family (including step relatives), however, a few will accept wider family such as uncles and aunts.

These type of mortgage requirements are quite complex and specific, therefore, it is advisable to seek the assistance of a mortgage broker who will be better informed of which lenders may be able to consider such applications.

If you make an enquiry we can arrange for a concessionary purchase mortgage broker we work with to get in touch and discuss further with you.

Why would a house become available below market value?

There is an urban myth that to purchase (or sell) a property well below its actual worth may be unethical (or even illegal) in some way. Buying a house below market value, with or without a mortgage, is generally a perfectly acceptable practice.

There are a number of genuine circumstances where this may occur, such as:

  • Sale from one family member to another
  • Property deliberately undervalued for a quick sale
  • Financial difficulties
  • Properties available through an auction

Sale from one family member to another

Probably the most common reason for houses to be bought and sold below market value is when it is between family members. Parents who own a property portfolio can help their children get on the property ladder by selling them a house at a cheaper price.

The additional benefits include saving money on estate agents fees. However, as you’ll see in the section below, there are tax considerations to take into account for such transactions along with other costs which would still apply regardless of who the buyer and seller are.

Property deliberately undervalued for a quick sale

There are a number of valid reasons why this situation may arise. It may be a recently separated couple needing to sell the marital home in order to finalise their divorce or property bequeathed to someone from a recently deceased relative needs to be sold before their inheritance tax affairs can be settled.

Financial difficulties

Another common occurrence, particularly in the current climate. Someone experiencing financial difficulties may need to sell their home to avoid an imminent repossession or bankruptcy, therefore, reducing the price below market value can entice prospective buyers.

Properties available through an auction

Generally, properties sold through an auction have what is called a ‘reserve price’ which is the minimum amount a seller is willing to accept. This price, if met, may be below the market value of the property, representing good value for the buyer.

Lenders who use auctions for selling repossessed properties may wish to simply achieve a figure covering all outstanding costs and monies owed which may amount to a valuation below the market value.

If you have the opportunity of buying a house below market value and would like to discuss the best mortgages available and most suitable for your circumstances, get in touch and we can arrange for an advisor we work with to contact you. They can offer you bespoke advice and connect you to the right lender for your needs.

Are there any tax implications when buying a house below market value?

The main circumstance where certain additional tax implications, over and above the norm, may arise is when someone buys a house below market value from a family member.

The type of tax implications that could occur, usually involve:

  • Capital Gains Tax
  • Stamp Duty
  • Inheritance Tax

Capital Gains Tax

Capital gains tax (CGT) is not applicable on the sale of someone’s main residence. However, it does normally apply on the sale of any secondary property. Any equation used to calculate what CGT may be owed must use the market value of the property rather than the price it was sold for.

If your looking at buying a house below market value from your parents property portfolio this may give rise to a CGT liability for them. For example, if a second property was bought for £100,000 by your parents and they are selling it to you for £150,000 but the market value is £200,000 the taxable gain equates to £100,000 not £50,000.

At the time of writing, the CGT liability is 18% for base-rate taxpayers and 28% for high-rate taxpayers (after CGT allowances). Base-rate taxpayers would be liable for 28% on any portion of the CGT gain that moves them into the high-rate band.

If you’re currently in the process of buying a property from a relative and want to know how much CGT they may be liable for you can use the official UK government tax calculator here.

Stamp Duty

Regardless of how much you pay for your new property (or who you buy it from), as the buyer you will be liable for any stamp duty.

The amount of stamp duty you owe depends on the purchase price rather than the market value, therefore, buying a house below market value could affect how much stamp duty you may have to pay.

The table below illustrates the stamp duty tax rates for each property band. The rates differ for primary and secondary properties.

House Price Threshold Standard Stamp Duty Rate Second Property Stamp Duty Rate
Up to £125,000 0% 3%
£125,001 – £250,000 2% 5%
£250,001 – £925,000 5% 8%
£925,001 – £1.5 million 10% 13%
£1.5 Million + 12% 15%

If you buy a house from a relative or through an auction for, say, £115,000 but the market value is £130,000 you’ve effectively saved yourself a stamp duty payment of £2,600.

Inheritance Tax

As with capital gains tax, another possible tax liability which needs to be considered for the seller is Inheritance Tax (IHT).

For example, if your father sells you his property for £300,000 but the true market value is £500,000 the difference between the two amounts – £200,000 – would be treated as a lifetime gift for IHT purposes.

If your father dies within seven years of making this lifetime gift then there may be an IHT liability. If he dies within three years the whole amount of the lifetime gift could be liable (40%). After this point the rate reduces on a sliding scale and after seven years the liability is 0%.

If you have any questions or concerns at all about the possible tax implications which may occur through buying a house below market value, it’s extremely important to seek independent advice from a tax specialist. Make an enquiry and we can arrange for an expert broker to speak with you directly.

Why you should speak to a mortgage broker if you’re buying below market value

You should seek specialist advice because not all lenders have the right knowledge and expertise to help out borrowers who are buying below market value.

While you could search the entire market and make multiple enquiries in search of the right lender, this demands a lot of legwork, plus having too many hard lender searches on your file could jeopardise future applications for credit.

Luckily for you, the advisors we work with have access to the entire market and they can search it on your behalf. They will connect you to the lender best positioned to offer favourable rates to a borrower with your needs and circumstances.

At Online Mortgage Advisor we can offer you a first-class service tailored to your own specific needs with access to the most experienced brokers available that:

  • Have whole of market access
  • Can offer bespoke advice to borrowers buying below market value
  • Have excellent relationships with lenders who specialise in concessionary purchases
  • Are OMA accredited advisors
  • Have completed a 12 module LIBF accredited training course

Speak to a mortgage expert about buying below market value

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 4th December 2020
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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.