Buying Property Below Market Value
Buying a property below market value (BMV) essentially means that you are acquiring the property for a low price. This is ideal for people who do not have a large deposit.
What is a “favourable sale”?
If you are buying a property for less than the market value then this is known by the banks as a “favourable sale”.
There are two main types of favourable sales:
- Parents selling a property to their adult child: If your parents have several investment properties then they may decide to help you get a head start in life by selling you a property below its market value.
- Buying a property to recover a debt: If someone owes you a significant sum of money then you may reach an agreement where they sell a property they own to you for less than it is actually worth instead of repaying the debt. This is a common way for people to settle debts in the construction industry.
The banks have special lending policies for favourable sales, and although there may be plenty of “gifted equity” in the property, banks are often hesitant to grant approval for the mortgage. Read on to find out how to get approved…
Do I need a deposit?
The majority of banks will require you to have 5% in genuine savings irrespective of how much of a discount off of the purchase price you are getting. However some banks can accept a favourable sale with no savings whatsoever.
How much can you borrow?
Some of our lenders have excellent policies that allow you to maximise the amount you can borrow.
If you have 5% in genuine savings: You can borrow up to 95% of the property value as long as you do not borrow more than 105% of the purchase price.
If you do not have any savings: You can borrow up to 90% of the property value as long as you do not borrow more than 105% of the purchase price.
Guarantor mortgage: 100% of the property value plus costs.
Low doc: 60% of the property value (80% is available in some circumstances) as long as you do not borrow more than 100% of the purchase price.
Discounts: Competitive professional package and basic loan discounts are available.
Note: Most lenders are very restrictive in the way they assess home loans to fund the purchase of a property below it’s normal market value. Some will lend no more than 80% of the property value and others will use the lesser of the purchase price or valuation in their assessment!
The LVR calculation is different
The Loan to Value Ration (LVR) is the loan amount divided by the lesser of the purchase price or valuation. Banks use the LVR to calculate the risk of your loan, and to work out the maximum amount that you can borrow.
With a favourable sale the banks with the most progressive lending policies will calculate the LVR using their bank valuation only, they will not take the purchase price into account.
Why are the banks so conservative?
Australian banks are very wary of favourable sales. This is because these sale types are often without the intervention of an agent, which is known as an ‘off the market transaction’.
Banks know that if there is no Real Estate Agent listed on the contract of sale then there is a higher risk of fraud and if their valuer makes a mistake then they could make a significant loss.
How do the banks protect themselves?
Because of the nature of this type of sale, banks will always order a valuation to confirm the property value & will investigate the details of the purchase to ensure that they are comfortable with the transaction.
Some Lenders Mortgage Insurers used by the banks have policies that make it near impossible for you to borrow over 80% of the property value.
Thankfully, not all lenders & LMI providers have these policies.
If you need help getting your loan approved then please enquire online and one of our mortgage brokers will give you a call to discuss your situation.
How much stamp duty will I pay?
The exact method that is used to calculate stamp duty varies depending on the state you are in. In most states you will be required to arrange a stamp duty valuation from a licensed valuer. You will then pay stamp duty based on this valuation, not on the purchase price.
In other words don’t expect to get away with paying less stamp duty, it is only the purchase price that has been discounted!
An example purchase
John wants to sell his investment property valued at $500,000 to his son Richard. However instead of selling it at market value, John decides to help Richard by selling it to him for only $400,000.
Richard has no savings so most lenders would be unable to give him a home loan.
However one of our lenders would be able to approve a loan for up to $420,000 (105% of the purchase price) because he is not borrowing more than 90% of the market value of the property ($450,000).
Because Richard is borrowing over 80% of the property value he would need to pay Lenders Mortgage Insurance.
Buying under market value
Where you are not buying the property off your parents and see a house advertised at below market value, it is important to do some research before you purchase.
Some sellers need a quick sale for genuine reasons, others may be selling the property where there have been problems with the house.
If the bank is exercising the power and sale and foreclosing, the property may also be under value.
It is also advisable to further negotiate. Generally, the seller will be more flexible, especially where a quick sale is imperative.
If you are looking to purchase a property below market value and require a loan please call us on 1300 889 743 or enquire online and one of our mortgage brokers can help you to finance your purchase.
Apply for a home loan
We are the experts in this area!
- We know which lenders will allow you to borrow 100% of the purchase price.
- As most of our brokers have worked for the major banks, we understand how they think.
- Our mortgage brokers can help you formulate your loan application to ensure approval.
- Nationwide Services!
Our mortgage brokers are specialists in helping people who are buying a property below its actual value, and who need to borrow 100% of the purchase price.
Please enquire online and one of our mortgage brokers will give you a call to discuss your circumstances, and will then give you several competitive options to choose from.