Buying A Property Below Market Value

Buying a property below market value can help you get into the property market sooner, especially if your deposit is limited. In lending and accounting terms, this is known as a favourable purchase or bargain purchase. While it can work in your favour, lenders apply stricter policies when assessing these transactions.

Common Favourable Purchase Arrangements

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’s 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.

How Much Can You Borrow When Buying Below Market Value?

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 don’t borrow more than 105% of the purchase price.
• If you don’t have any savings: You can borrow up to 90% of the property value as long as you don’t borrow more than 105% of the purchase price.
• Guarantor mortgage: Borrow up to 105% of the property value.
• Low doc: 60% of the property value (80% is available in some circumstances) as long as you don’t 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.

Can You Buy Below Market Value With No Deposit?

Yes, in some cases.

If the discount between the purchase price and market value is large enough, it may effectively act as your deposit.

However:

• Many lenders still require 5% genuine savings
• Some will allow no savings, but with stricter assessment criteria
• Strong income and a clean credit history become more important

How Do Banks Calculate LVR For Below Market Value Purchases?

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 won’t take the purchase price into account.

An example purchase

George wants to sell his investment property valued at $500,000 to his son Richard. Instead of selling it at market value, George 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’s 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’d need to pay Lenders Mortgage Insurance.

Get Help With A Favourable Purchase Home Loan

If you’re planning to buy a property below market value, speak to a specialist mortgage broker who understands how to structure these deals properly.

Call 1300 889 743 or enquire online to explore your options and get matched with lenders that suit your situation.