One of our most popular blog posts in the past has been in relation to concessionary purchase. This is where a relative can gift equity in a similar way to cash. By offering the property with a discount against the market value, the buying relative in this situation can often get a mortgage for 100% of the discounted purchase price and no cash need change hands. As two lenders have recently revised their terms in regards to concessionary purchase, we thought it was time to get our readers up to speed with the recent developments.
Coventry Building Society is the first of the two to review their concessionary purchase terms. Most importantly, they will now allow buyers to purchase the property as an investment property. Some lenders used to allow this many years ago, and it’s surprising it’s taken this long to be put back on the table. Now that the main issue with BTL is the larger deposit requirement, the maximum Loan to Value will be 75%. This means, for the buyer to put no money down, the discount would need to be 25%!
This may be very useful to many existing investors looking to sell. Statistics are yet to verify the true situation here, but media reports and industry speculation suggests that many investors will look to sell investment property as the effects of the new Section 25 tax rules come into force from April this year.
Often investors are thinking about their children and relatives when they are wealth planning, for whom generating wealth and creating income is much harder in today’s economy. Being able to pass on assets to children therefore, at the same time as mitigating the effects of the tax changes, may well be a very welcome opportunity.
It’s worth noting that buyers would still need to meet Coventry BTL criteria. The main points include a £30k joint or £25 sole income, applicants need to be homeowners (either now or in the past), and the property will need to meet rental income calculations.
The second to update their concessionary purchase terms is Nationwide. They have introduced an option whereby the existing tenant can benefit from a discount on the property in order to purchase. Halifax have been offering this option for some time, and it’s good to see some competition to this niche, especially as Nationwide are generally very competitive in regards their rates.
Why would a landlord consider this as an option? It is perfectly understandable when a parent offers a discount to a child that, at some point in life, wealth is going to be passed down the generations and it makes sense to do this in a way and at a time that benefits both as much as possible, but a tenant is a business relationship.
If you consider the costs of selling a property however, it becomes a little more understandable. Often when new buyer look at a property the first thing they think about is revamping existing décor, kitchens and bathrooms. They often want to factor this into the price when they offer and so the market value might be affected by this. Many buyers would be attracted to a property that was empty, cleaned and well-presented, and this is much easier once the current tenant has vacated.
The cost of having a property empty for 2 – 3 months whilst the property sells could account for a significant amount of money. For instance, on a property worth £150k that rents for £850 a month, the percentage cost of 6 months without a tenant (and don’t forget this period will cover clearing, redecorating, advertising and viewings, negotiation and the buyers’ mortgage and conveyancing process) equates to about 3.5% of the value of the property.
Also, the cost of selling a house is significant. Typically, estate agency fees can be anything from 1.5% to 2.5%. In total, selling a property that’s tenanted might see a cost of around 6% deducted from the market value in costs.
If you were to offer a 10% discount to a tenant on an optimistic market value, the net result may not be very far off the net figure you would realise on the open market. The only exception is you would continue to receive rental revenue right up until completion, can forgo cleaning and decorating, and avoid the frustrations associated with property negotiation. This is not to mention the risks of sales falling through on property not receiving a rental income.
If you have plans to sell property in the near future the above regarding concessionary purchase may well be worth taking into account. We would be more than happy to talk through in more detail the underlying finance options, and provide advice should you be interested in taking advantage of these opportunities.