Buying a property under market value can be an excellent opportunity to secure a great deal and maximise your investment. But it can also be confusing and even a little overwhelming. Fortunately, our expert mortgage brokers are here to guide you through the process, providing you with valuable insights and strategies to identify properties with the potential for a favourable purchase.
Property prices across Australia have exploded in recent years. In Brisbane, Sydney, Adelaide and Melbourne the median house price has increased by 40-50% since 2013. With property prices continuing to climb, it’s no surprise that first home buyers and investors alike are on the hunt for a property bargain. This is where a favourable purchase could prove to be highly valuable.
From understanding market trends and conducting thorough research to negotiating skillfully on your behalf, we have the knowledge and expertise to help you make informed decisions and seize opportunities that can lead to substantial savings. Let us help you unlock the potential for a favourable purchase in Australia.
But first of all, what is a favourable purchase? What are the pros and cons of a favourable sale? And how hard is it to secure a below market value home loan in Australia?
So, what is a favourable purchase? It’s a financial term that refers to acquiring a property with a bank valuation that is higher than the purchase price. In other words, it’s paying less for a property than what the bank thinks it’s really worth. Simply put, it’s scoring a bargain!
The most common example of a purchase that is classified as “favourable” would be when a homeowner decides to sell a property to a close family member in order to assist them financially (often a parent selling to a child). Rather than selling at full market value and then gifting cash to the family member, the homeowner may offer to sell the property to them for a reduced rate instead. In this way, they’re helping out a family member but still keeping the property (perhaps a beloved home) from being sold to strangers.
Buying a property for less than the estimated market value can present buyers with the chance to build equity, achieve higher returns on investment or simply acquire a property that better aligns with their budget and future financial goals.
There are a variety of situations that could lead to a favourable sale in Australia. Here are a few examples:
Properties that are in poor condition or in urgent need of renovations or repairs may be priced below market value.
Sometimes, if a seller prefers to keep their property sale discreet, they may choose not to list it publicly. These off-market opportunities may attract fewer buyers, leading to a lower sale price.
Auctions can create opportunities to buy properties under market value, especially if there is limited competition on the day of the auction or if the property fails to meet its initial reserve price.
Property owners who are highly motivated to sell quickly may be willing to negotiate a lower price than what the property is actually worth. This could be due to financial constraints, relocation or personal circumstances (i.e., in the case of a relationship breakdown or when selling property cheaply to a family member).
During downturns or slower market periods, sellers may be more open to accepting offers below their initial asking price. These fluctuations can provide opportunities for savvy buyers to secure a property for less than the market value.
With a favourable property sale, it may be possible to secure finance without a traditional deposit. This is because the lender calculates your home loan based on the property’s true value rather than the purchase price. By securing a property for less than the true value, you’re effectively being gifted equity in the property.
Typically, lenders require a deposit, which is a percentage of the property’s purchase price. However, when buying a property below market value, the lender may recognise the gifted equity as a substitute for the deposit.
Let’s say you find a property that is being sold below its market value, and the agreed purchase price is $400,000. However, when the lender conducts a valuation of the property, they determine that its true value is $500,000. In this case, the lender considers the $100,000 difference between the purchase price and the property’s true value as gifted equity.
Typically, lenders require a deposit, which is a percentage of the property’s purchase price. However, in a favourable purchase scenario, the lender may recognise the gifted equity as a substitute for the deposit.
In other words, the equity provided by the difference in value between the purchase price and the property’s true value can be considered as your deposit.
Another major benefit of a favourable purchase is getting a Lenders Mortgage Insurance (LMI) exemption. How does this work? LMI is typically required by lenders when borrowers have a loan-to-value ratio (LVR) higher than 80% (meaning they’re borrowing more than 80% of the property’s value).
However, when you acquire a property below its market value, the true property value is generally higher than the purchase price. This creates an opportunity to secure a loan with a lower LVR, which can potentially help you to fall below the 80% threshold. As a result, you may not be required to pay Lenders Mortgage Insurance or you may qualify for a reduced LMI premium.
Let’s say you find a property with a market value of $500,000, but you negotiate a price of $400,000. You have a deposit saved, but it’s only equal to 5% of the purchase price. In a typical mortgage application, you would be required to pay LMI, since you’d be borrowing with a LVR of 95%.
However, in this scenario, the lender factors in the true value of the property ($500,000) and determines that you have $100,000 of gifted equity that you can use as your deposit (equal to 20% of the true property value). Since your loan now falls within the 80% LVR threshold, you may avoid the cost of LMI altogether. By avoiding Lenders Mortgage Insurance, you could save thousands of dollars in added mortgage fees.
Stamp duty is a state-based tax imposed on certain transactions, including property transfers, and is calculated based on the property’s market value or the purchase price, whichever is higher.
When buying below market value, it’s important to consider the potential impact on stamp duty. Why? Because buying a property below its true value can result in stamp duty being calculated at a higher rate than you might be thinking.
When the purchase price is lower than the property’s market value, the stamp duty may still be calculated based on the market value rather than the purchase price. So, you could end up being charged substantially more stamp duty than what you were expecting.
To ensure you fully understand the specific stamp duty implications for a favourable sale, we recommend you consult with a conveyancer, solicitor or relevant government authorities in your state or territory.
Yes, you can. However, when it comes to favourable purchase Australia has some conservative lending policies. Many banks and non-bank lenders are somewhat wary when it comes to financing a property that is being sold below the market value. Why? Because these kinds of purchases are often completed off-market, or without the involvement of a real estate agent and run a higher risk of fraud.
However, this doesn’t mean you won’t be able to secure a loan for a favourable sale. It just means that the lenders will be diligent in securing their own independent valuation of the property and they may have policies capping your borrowing capacity at 80% of the property’s true value. They may also want to know the circumstances that led to the property purchase price being significantly reduced.
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Stamp duty is a state-based tax imposed on certain transactions, including property transfers, and is calculated based on the property’s market value or the purchase price, whichever is higher.
To ensure your property sale goes ahead smoothly, why not talk to a mortgage broker with experience in favourable purchase home loans? At ZEP Finance, our friendly team of brokers specialise in assisting clients with unique financing needs, including home loans for properties purchased below market value.
We understand the intricacies of this type of transaction and can guide you through the entire process. We have established relationships with a wide network of lenders who offer home loans for properties purchased off-market or through a favourable sale. Whether you’re purchasing a property below market value, negotiating with family members or exploring off-market opportunities, we have the knowledge and resources to help you navigate this unique area of the lending landscape.
Fill out the form on the right to get started on your homeownership journey today!
Yes, it is possible to make a favourable purchase from a family member, as long as both parties agree on the purchase price and comply with legal requirements and regulations.
The bank valuation of property may take 1 to 2 weeks to complete, but it can be shorter or longer depending on the circumstances. It would depend on factors such as property type and location, property accessibility, demand and workload, valuer availability, and lender processes.
The purchase price in a favourable purchase is typically determined through negotiations between the buyer and the seller, taking into consideration factors such as the property’s market value, condition, location, and the seller’s motivations.
The eligibility for first home buyer benefits or grants with a favourable purchase may vary depending on the specific requirements and regulations of the grant programs in your state or territory. It’s advisable to check with the relevant government authorities or seek professional advice to determine your eligibility.
LVR stands for Loan-to-Value Ratio, which is a term commonly used in the context of home loans. LVR represents the proportion of the loan amount in relation to the value of the property being used as collateral for the loan.
The LVR is calculated by dividing the loan amount by the appraised value or purchase price of the property (whichever is lower), and then multiplying the result by 100 to express it as a percentage. For example, if you have a loan amount of $300,000 and the appraised value of the property is $400,000, the LVR would be 75% (calculated as $300,000 / $400,000 * 100).
A conveyancer or solicitor plays a crucial role in a favourable purchase by handling legal aspects, conducting property searches, preparing legal documents, advising on contractual matters, ensuring the transfer of property ownership, and protecting the buyer’s interests throughout the transaction.
The purchase price in a favourable purchase is typically determined through negotiations between the buyer and the seller, taking into consideration factors such as the property’s market value, condition, location, and the seller’s motivations.
It’s important to consult with a legal professional to understand any legal considerations or risks associated with a favourable purchase, such as contract terms, property title issues, and potential liabilities.
Yes, once you own a property acquired through a favourable purchase, you have the flexibility to sell it at its market value. This allows you to potentially benefit from any appreciation in property value since the time of purchase.
Yes, a favourable purchase strategy can be used to purchase your first home. It may provide financial advantages and help overcome affordability challenges for first time buyers.
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