Are your mum and dad are looking to sell their home? Have you asked them if they can sell their home to you below market value?
This type of home loan arrangement, known as a “favourable purchase”, is one of the best ways to get into the property market and it benefits both you and your parents.
How much can you borrow?
- 90% of the property value: No genuine savings required.
- 95% of the property value: LMI applies and you must show that you have at least 5% in genuine savings.
- 100% loans: Available with some of our lenders if you have a guarantor.
Give us a call on 1300 889 743 or fill in our free assessment form and discover if you qualify!
Why should you buy your Mum and Dad’s home?
If your parents are reaching the retirement age or they’re in a good financial position and own several investment properties already, a favourable purchase is a good option because:
- You can buy the property below market value.
- You may avoid the cost of LMI: This will depend on the ratio of your loan to the value of the property (LVR). If you’re only borrowing 80% of the market value, you can avoid LMI. Any more and this cost will apply.
- It puts money in your parent’s pocket: You could be purchasing the property prior to your parent’s retirement and paying off the mortgage for them. By the time they retire, you’ll likely have paid off most of the remaining mortgage off and you can either use the house as an investment property or move into the home yourself.
- No real estate agent is required: Your parents save even more money.
- No Contract of Sale is required: Although it’s not a requirement, it’s still advisable that the usual mortgage documents are used including the Contract of Sale and that each party receive separate and independent advice from a solicitor.
- You can avoid a gift tax: You won’t have to pay the tax usually associated with inheriting a property as a gift.
- Instant equity in your property: Depending on how much your parents sell the property to you for, you’ll have equity in your property to use towards another investment property. For example, if your parents sold the property to you for 80% of the market value, you’d have 10% in equity to use for investing.
- You don’t need a second security: Like a guarantor loan, a favourable purchase is a way for parents to help their kids get into the property market. With this arrangement though, mum and dad also get to benefit and they don’t need to put up their house as security for the mortgage.
How does it work?
When buying property from your parents, the first thing you need to do is agree on a price. You’ll then need to demonstrate to the lender that the purchase price is less than the market value.
Thanks to the special relationships we have with lenders on our panel, our brokers can do all of this for you by ordering up to three upfront bank valuations and then go with the highest valuation.
The higher the valuation, the less your LVR and the easier it will be to get your loan approved. It also means more equity for you.
By doing an upfront valuation, we can also tell you how much more in additional funds you may require in order to complete the purchase.
Do you qualify?
Generally speaking, both parties must be related and preferably in a parent-child relationship.
If neither you or the seller (vendor) are related, we may still be able to get you approved anyway.
The banks don’t mind too much if you’re wanting to buy a property market below value! Find out more on our ‘Purchasing A Home Below Market Value’ page.
Call us on 1300 889 743 to find out if you’re in a position to qualify for a favourable purchase home loan.
Do you need a deposit?
You don’t need a deposit but in some cases, you may need to prove that you have at least 5% in genuine savings.
For example, if the property is valued at $500,000 and your parents sell the property to you for $475,000, you’re borrowing 95% of the property value and you’d need to show that you have at least 5% of $475,000 ($23,750) in a savings account.
At 90% of the property value ($450,000), you won’t need to prove genuine savings. Better yet, if your parents sold the property to you at 80% of the property value ($400,000), you can not only avoid genuine savings but LMI as well.
We specialise in favourable purchase home loans so we may able to get you approved to borrow 105% of the purchase price including stamp duty and legal fees.
Discuss your situation with one of our brokers and discover if you qualify by calling 1300 889 743 or by completing our free assessment form today.
Tips when buying your parents’ property below market value
Three key things to know when buying your parents’ property below market value:
- Firstly, some lenders can use the real property value rather than the purchase price when calculating how much they’ll lend. For example, if the property is worth $1.5 million, some lenders can lend 80% of the property value, i.e. $120,000 even though the (discounted) purchase price is $900,000.
- Secondly, you pay stamp duty based on the real value regardless of the purchase price. Your conveyancer/ solicitor will organise a stamp duty valuation which is used to show the government the real value.
- Lastly, one concern is that if you and your spouse split up then it would be unfair to the parents who sold you their house below value as you’d be effectively gifted a large sum of money. So one potential better way to structure it is to have the purchase price as the real value and to have the parent give a loan (no interest and no repayments) for the difference e.g. $1.5m – $900k = $600k loan. This can have a formal agreement and be secured on the property via a mortgage/caveat and that is all really simple to do through your conveyancer solicitor. You may not split up hopefully but being risk-averse is always a good approach.
Can you use the equity to buy an investment property?
Once your loan is settled, you’ll have instant equity in your home which you can then use to buy your own investment property.
In many cases, we deal with clients whose parents are yet to pay off the mortgage on their home. The son or daughter may well have inherited the property anyway so they usually agree to purchase the property and allow their parents to remain in the property at a reduced rent.
Buy a property below market value today!
Get into the property market and help your parents out as well! Call 1300 889 743 or fill in our free assessment form today!