Buying A Property Below Market Value
Buying a property below market value (BMV) essentially means that you are acquiring the property for a low price.
Favourable purchases are ideal for people who do not have a large deposit. Discover how you can qualify for a home loan.
How much can you borrow?
Some of our lenders have excellent policies that allow you to maximise the amount you can borrow when buying a property below market value.
- 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: Borrow 105% of the property value.
- 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 for buying a property below market value. Some will lend no more than 80% of the property value while others will use the lesser of the purchase price or valuation in their assessment.
Please call us on 1300 889 743 or enquire online to find out how much you can borrow.
What is a favourable sale?
If you are buying a property below market value then this is known by the banks as a “favourable sale”.
A favourable purchase or sale comes in two forms:
- 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 home loan lending policies for buying a property below market value. For example, there may be plenty of “gifted equity” in the property but banks are often hesitant to grant approval for the mortgage.
Do I need a deposit?
The majority of banks will require you to have 5% in genuine savings no matter how much the property value has been discounted.
Despite this, buying a property below market value will accepted by some banks with no savings whatsoever.
The LVR calculation is different
The Loan to Value Ratio (LVR) is the home loan amount divided by the lesser of the purchase price or valuation.
Banks use the LVR to calculate the risk of your mortgage and to work out the maximum amount you can borrow.
With a favourable purchase, 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 when it comes to buying a property below market value. The reason is that these favourable purchase arrangements are often made without the intervention of an agent, 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 buying a property below market value, banks will always order a valuation to confirm the property value and investigate the details of the favourable 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 and LMI providers have these policies.
If you need help getting your loan approved then please enquire online and call one of our mortgage brokers on 1300 889 743 to discuss your situation.
How much stamp duty will I pay?
The exact method that is used to calculate stamp duty depends on the state you’re 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 the valuation, not on the agreed 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. 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, in most cases, a lender would be unable to give him a home loan.
However, one of our lenders can approve Richard for a loan of 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
When you’re considering buying a property below market and it’s not from your parents, it’s important to do some research before you purchase.
Some sellers need a quick sale for genuine reasons while others may be selling the property where there have been problems with the house.
The most common type of property that has no problems with it, yet is sold below market value, is when a bank is foreclosing on a property.
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 buy a property below market value and need a home 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 home loans for buying a property below market value!
- 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 to borrow 100% of the purchase price of a favourable purchase.
Please enquire online or call 1300 889 743 and one of our mortgage brokers can provide you with several competitive options to choose from.