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What you should know before buying a property below market value
We all look out for good deals and would love to get our dream home at a price below the market value. You may strike it lucky and be offered a house at a price lower than the property’s value. You'll likely need finance to close the deal, so you’ll want to know the policies of lenders when it comes to below market value property mortgages.
How can I buy a property below market value?
There are a few circumstances under which you may be offered a house at a price lower than its current market value:
- Your parents may offer you a property they own. Possibly they have one purchased as an investment, or they want you to have their current home while they move into a smaller one. They may offer you their house at a price below its market value because they want to help you.
- Another reason someone may offer you a property below market value is that they owe you a large debt they cannot repay. They may enter into an agreement to sell you the property at a low price as a way to settle the debt.
- Sometimes a house owner who cannot make mortgage repayments and fears foreclosure may be in a hurry to sell the property and settle the loan. In this case, the owner may offer a low price so as to strike a deal quickly. This could also happen if an owner has listed a property for a long time but has been unable to sell and needs funds urgently.
If you are buying a property below market value, it’s known as a 'favourable purchase'. However, you will have to pay stamp duty on the valuation, not on your purchase price - one of the potential drawbacks of such a transaction.
What are the policies of lenders for favourable purchases?
Your lender will have specific policies for your home loan to buy a house below the market price. You may be at an advantage if you are not required to pay a deposit or purchase lender’s mortgage insurance (LMI), but a potential disadvantage is that some lenders may be reluctant to finance a favourable purchase transaction.
Here are some possible policies of lenders that could affect your purchase:
Deposit
Most lenders will require you to have five per cent of the purchase price in genuine savings, but you may be able to find one that doesn't require any deposit at all. This is possible because your loan is calculated on the market valuation of the property and not your purchase price, which may give you enough equity in the property to fulfil the lender's deposit requirements. If you have five per cent in genuine savings, you may be able to borrow 95 per cent of the property's valuation, but not over 105 per cent of the purchase price.
Avoid LMI
In a favourable purchase, you may be able to avoid buying lender’s mortgage insurance (LMI), even though you have borrowed over 80 per cent of the purchase price. This is because the lender calculates the loan-to-value ratio (LVR) on the market price rather than your purchase price, so your equity may be able to stand in place of a deposit.
Some lenders may be wary
Many favourable purchase transactions happen between buyers and sellers who know each other without involving an agent. Some lenders may be concerned that if an agent isn't involved in the contract of sale, there is scope for fraud. They may consider your home loan application high risk and be wary of lending you money.
Disclaimer
This article is over two years old, last updated on March 25, 2022. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.
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