Concessionary Mortgages: A Hassle-free Exit Strategy for Landlords?
There is a growing trend among landlords in the private rental sector (PRS) who are seeking a quick and painless way to exit their property investments: concessionary mortgages. These lesser-known mortgage deals enable sitting tenants to purchase the property at a discounted price based on a valuation.
To qualify for a concessionary mortgage, the seller must be willing to sell the property for at least 10% below its market value. In turn, the seller gifts the deposit to the buyer in the form of equity in the property, ranging from 10% upwards. Buyers also have the option to contribute some of their own funds to increase the deposit amount.
Although landlords may experience a reduction in the selling price on the open market, selling to a tenant offers several advantages. These include:
- Avoiding estate agent fees
- Completing a swift and uncomplicated sale
- Ensuring a guaranteed rental income until the property is eventually transferred.
First Time Buyer Imaginary example
Imagine a scenario in which a first-time buyer couple from North Devon capitalises on an opportunity to buy their home for £279,000 when their landlord decides to sell. This purchase price is a 10% discount on the home's actual value of £310,000. They go the extra mile by pooling more funds for a deposit, thus achieving an 85% loan-to-value (LTV) ratio. By contributing an increased deposit, they manage to secure a lower interest rate from their lender, reducing both the loan amount and the interest rate. This smart financial manoeuvre helps in significantly reducing their monthly repayments. Consequently, their monthly mortgage instalments are only marginally higher than what they used to pay in rent. And the best part is, they are now homeowners!
Benefits for Tenants and First-Time Buyers
There are several advantages for both tenants and first-time buyers when considering concessionary mortgages. Here are just a few:
Familiarity and Peace of Mind:
Purchasing a property that a tenant is already familiar with provides a sense of comfort and peace of mind. They are already acquainted with the property, knowing its ins and outs, which eliminates the risk of unexpected costly surprises.
Avoiding Competitive Market:
First-time buyers often face tough competition in the housing market, spending countless hours viewing properties and engaging in price negotiations. However, with a concessionary mortgage, they can bypass this exhausting process and focus on acquiring a property they are already connected to.
Time and Effort Savings:
By purchasing the property they have been renting, tenants can save significant time and effort that would otherwise be spent on searching for and viewing other properties. They can bypass the arduous task of house hunting and invest their energy into securing a home they are already comfortable with.
The discounted house price associated with concessionary mortgages gives both tenants and first-time buyers a financial advantage. They can acquire the property at a lower price than the market value, potentially providing them with more affordable mortgage repayments and increasing their overall purchasing power.
Overall, concessionary mortgages offer tenants and first-time buyers the opportunity to enjoy a seamless and advantageous transition to homeownership. By purchasing a property they are already familiar with, they can avoid the stress of competitive markets, save time and effort, and potentially secure a property at a discounted price.
As the profitability of buy-to-let investments diminishes, industry experts predict that concessionary mortgages could gain popularity. However, it is worth noting that these mortgages are not widely available, with only a handful of lenders offering them. Furthermore, they are predominantly taken up by first-time buyers. Nonetheless, John Huchings, an advisor here at Tuckers Financial, believes that these mortgage deals will become more common as landlords reassess their positions in the market.
John points out that lenders will assess the plausibility of such arrangements. Lenders may require tenants to contribute to the deposit from their personal savings. For instance, if a tenant is offered a property valued at £150,000 with a market value of £200,000, lenders may not be satisfied if the full deposit is offered as a discount by the landlord.
Additionally, the duration of the tenant's occupancy plays a role in determining plausibility. A tenant who has resided in the property for only two months may appear less plausible compared to someone who has occupied it for a few years.
Concessionary mortgages offer an intriguing prospect for landlords seeking an expedited exit strategy from the PRS. As more lenders embrace these mortgage options, and landlords carefully assess their circumstances, we may witness an increase in their utilisation in the coming years.
Alternative Forms of Concessionary Purchases
Concessionary mortgages are not limited to tenants and first-time buyers . Other scenarios where this approach can be beneficial include:
Parents may choose to sell their former family home to their children, or individuals may want to sell their property when transitioning to residential care. In these cases, the concept remains the same: the seller gifts the deposit to the buyer in the form of equity in the property. The buyer also has the option to contribute their own funds to increase the deposit size.
Motivations for Family Members:
There are several compelling reasons why family members might consider this approach. For sellers within the family, receiving slightly less than the market value for the property may not be a significant concern. Helping a loved one step onto the property ladder can be a rewarding experience in itself. Moreover, if the seller has owned the house for many years, they may have already benefited from historically rising property values, potentially resulting in overall profitability even with a discounted sale.
Concessionary purchases extend beyond the tenant-landlord dynamic and can facilitate mutually beneficial transactions within families. Sellers may prioritise assisting their loved ones or have already profited from the property's appreciation over time.
Here at Tuckers Financial, we have a wealth of experience assisting clients with their mortgage requirements. If you are seeking guidance from a knowledgeable mortgage adviser, we encourage you to reach out to us. It would be our pleasure to provide you with the support you need. Contact us today to get started on your mortgage journey.