A growing number of people are taking out a little-known type of mortgage that allows them to buy a property without having to put down a deposit.
Several lenders offer “concessionary purchase” mortgages, meaning that a tenant can buy the property they are living in from their landlord at a marked-down price.
There has been a rise in take-up as tax changes on buy-to-lets and much higher mortgage costs prompt more landlords to sell. Now TSB, one of the lenders that offers these deals, reports significant demand.
“It’s gone from a product we never really spoke about to something that regularly comes up. We’re doing a steady number … there’s a demand for it,” says Roland McCormack, TSB’s mortgage distribution director.
For tenants given the chance to buy this way, it may be the best financial deal they are ever offered. And while it involves a landlord agreeing to take a lower price than they could potentially get on the open market, it also means a quicker, smoother sale – and no estate agent fees.
How do they work, and who can get them?
Quite a few banks and building societies offer mortgages that allow someone to buy a family member’s property for less than its market value – for example, when a parent wants to help their child on to the property ladder, so agrees to sell at a discounted price.
However, some lenders also accept mortgage applications from sitting tenants wanting to buy from their landlord, and from employees wanting to buy from their employer.
These are basically standard mortgages, but with one or two key differences.
Crucially, the seller typically has to agree to sell for at least 10% below its market value. Many landlords might find that hard to swallow. However, the seller will enjoy cost savings that, it is claimed, could offset about half of that loss.
In many, but not all, cases, the tenant does not need to put down a penny of their own cash as a deposit – in mortgage-speak, the landlord is giving the tenant “a gift of equity”, which is taken by the lender as a deposit. Assuming a 10% discount, the buyer would then take out a 90% loan-to-value (LTV) mortgage.
However, the buyer may wish to put in some of their own money to boost the deposit and bring down the LTV, which hopefully will give them access to a better rate.
The discount has to be a gift, not a loan, with no conditions attached.
These deals are something of a niche product but are clearly enjoying a bit of a moment.
Which banks or lenders offer these deals?
In addition to TSB, there’s the likes of Halifax, Nationwide, Barclays and NatWest.
Terms can vary. For example, TSB and Nationwide are among those that explicitly state they do not require the tenant to put down any deposit. However, both Barclays and NatWest say buyers need to contribute their own deposit on top – a minimum of 5%.
Typically, this is going to be an arrangement between a private landlord and tenant, though TSB and Halifax say the landlord can also be a local authority, indicating this could be an option for a council tenant where the right to buy is not available.
Why would a landlord agree to do this?
A combination of a less favourable tax regime for buy-to-let properties, and a string of mortgage-rate rises over the last two years, has led to many landlords baling out of the rented sector or evaluating their options. So there will definitely be some who are keen to sell.
By selling to their tenant, they avoid paying the costs normally associated with a house sale – notably estate agent fees, which can vary from less than 1% to as much as 3.5%. It also means they will not be paying perhaps several months of mortgage interest while the property is empty and on the market.
McCormack reckons those two savings will in effect cut the amount the landlord is giving away from 10% to more like 5%. “They are still out of pocket, but it’s a much smoother transaction for them,” he adds. “They don’t have to have a tenant move out of the property, do it all up and then wait several months – all while not receiving rent.”
On top of that, the landlord does not have to bother finding a buyer and dealing with lots of inquiries about the property.
One of the key benefits for a landlord would be the speed of a sale, “and, potentially, they don’t want to do a disservice to a tenant who has perhaps been living there for a long time”, says David Hollingworth of broker L&C Mortgages. If the landlord has made a decent amount from the property and has a good relationship with the tenant, they may like the idea of helping them become a homeowner.
Is this as good as it seems for the buyer?
Yes: they typically don’t need a deposit and are saving at least 10% on the market value.
Also, they know the property and the area, says McCormack. “They know the heating works, they know the neighbourhood, they know the glitches and they know the neighbours.”
A landlord’s £31,000 ‘gift’
First-time buyers Graham and Lisa received a huge financial helping hand to get on the housing ladder in the form of a £31,000 equity “gift” from their landlord to buy the home they had been living in for over three years.
They started renting the two-bedroom bungalow near Cheltenham in late 2019, and then, early last year, the landlord said he was looking to sell.
The couple, who had been thinking of trying to buy the property, spoke to a mortgage adviser who suggested a TSB concessionary purchase mortgage.
The couple made sure the terms were OK with the landlord – in particular, the 10% discount. He agreed, and they went ahead.
The house had a market value of £310,000. Once the £31,000 discount was applied, they required a £279,000 loan.
“We put in another £20K, so the deposit was £51,000,” says Graham, 32. That meant they were able to take out a mortgage (a five-year fix) for £259,000.
“This is probably the easiest way we could have got on the ladder,” says Graham, a production engineer working in aerospace. The couple did not need to move or compete with other buyers or “deal with any of the really difficult parts of housebuying”.
They are paying more monthly than they were when they were renting. “However, it’s into a mortgage, and the property is ours. Of course, we’ve got £30K of equity we did not pay for,” says Graham.