Concessionary purchase from family

musicgem

I'm looking for advice from members of the forum with experience of concessionary purchases...

My husband and I are first time buyers looking to purchase a house from my father which was bought last year as an investment. The house is currently valued upwards of £360k (based on an estate agent valuation 6 months ago). We are looking at a concessionary purchase, where we obtain a mortgage for £288k (80% of value), put in a cash deposit of £36k (10% of value), and receive a concession to the purchase price of £36k (10% of value).

I have a couple of questions:

1. Can anyone confirm that I have understood correctly that some lenders will consider the LTV of our loan to be 80% (based on the market value), rather than ~89% (based on the discounted purchase price)?
2. Is the purchase price in this situation considered £324k, and is this understood the same way by both mortgage lender/broker and solicitor/Land Registry?

Any help much appreciated!

audigex

1) Yes, because it's Loan To Value ratio, not Loan To Cash Deposit ratio.

2) The purchase price is considered to be whatever is transferred from your solicitor to his. Mortgage + Your own deposit

Eg I'm buying my mother's house for £95k, of which £70k is my mortgage, £10k is cash, and £15k is a discount from her (but it could equally be £25k with no cash)

Just make sure everyone is fully aware of the situation - particularly the lender (very important) and solicitor (less important, but will avoid confusion)

There are basically three numbers
1) Purchase price (how much actually gets sent) which would be £324k, for the solicitor, land registry etc, important for stamp duty and so on

2) Value would still be £360k, for the lender/broker - but make sure they're fully aware of the situation. This is important to get your LTV ratio correct and also make sure the lender is fully informed.

At the end of the day the solicitor only cares about getting the correct paperwork and legalities done. The lender only cares about their risk - ie how much the house would have to fall in value before their equity is at risk.

Note that my lender considered the donated equity to be a "Gifted deposit" in their terminology. I've no idea whether that translates to other lenders or is simply their own phrase they use.

amnblog

The problems in these cases occur where the buyer is using the difference between price and value as their total deposit (no cash going in), or where the seller is living in (and intending to continue to live in) the security property.


Neither of these appear to apply in your case.

pjcox2005

May want to check the tax position for your Dad. As you're a connected person and it doesn't sound like it's a house your Dad lived in then he maybe subject to capital gains tax with the proceeds being market value rather than the sale price.


May not matter if it hasn't gone up in value since he acquired it given the short space of time, but if it has then he could have a tax charge on money he never receives.

Thrugelmir

audigex wrote: »

The lender only cares about their risk - ie how much the house would have to fall in value before their equity is at risk.

That's a simplistic view of mortgage lending which isn't correct.

audigex

It is correct, in the specific context of talking about the lender's attitude with regards to equity gifts when looking at Loan to Value ratios

I'm clearly not saying the only thing they care about in any way is their own equity risk: I'm saying that as far as they're concerned an equity gift in the form of a discounted sale price is fundamentally no different to a cash gift given before purchase of the house at full price.

musicgem

Thanks for all of your responses, especially pjcox2005 for flagging the CGT liability for my father.

We have had a particularly frustrating experience of trying to establish which lenders would base the LTV of our loan on the property value, rather than the discounted purchase price, even using a broker. Different reps from the same lenders have given completely opposite advice, with many sticking to their guns on using the lower of the market value or purchase price, even when their lending criteria states they will lend up to the full discounted purchase price (and obviously don't do 100% LTV products).

As we are borrowing at a fairly high income multiple, which has limited our options, we have had to go with a lender that has told us they consider the purchase price to be the full £360k market value, considering there to be a 10% gift of equity as part of the deposit. Maybe I've read too many threads about concessionary purchases now, but I can't understand how in this instance the purchase price can be considered £360k, when as audigex stated only the loan and cash deposit (£324k) are being provided to my father in exchange for the property.

Also then with regard to SDLT, despite whatever figure the lender is quoting as the purchase price, the 'chargeable consideration' will still be £324k; my father is not receiving any money in exchange for the gifted equity as I understand it. So what value will we have to pay SDLT on?

TrickyDicky101

SDLT is only on the consideration so mortgage plus cash (£324k). What the lender is effectively saying (if I have interpreted your post correctly) is that for them to advance money for this concessionary purchase they will charge you a higher interest rate than they otherwise would if it was an 'arms length' transaction.

amnblog

Cannot understand why this has been a problem if you are using a broker.

The loan to value is worked out on the market value not the purchase price (which would be usual when the price is lower than the value).

LTV is 80% - it sounds like your broker has not done a CP before.