Favourable purchases, for the bargain-loving househunters

Some homebuyers get lucky: they have parents willing to sell their home to them at a bit of a discount. This means the property sells for less than market value. This is one example of a favourable purchase.

It's legal, but there is a catch: the government expects the buyer to pay stamp duty on the full market value of the property.

What is a favourable purchase?

A favourable purchase is where you buy a property for an agreed price which is below the property's actual market value.

Most often, this happens when a parent or family member sells their property for a favourable price. However, there are other circumstances where this could occur.

Some extremely motivated vendors might be willing, or forced, to sell their property below market value. If the vendor is in danger of foreclosure, needs to move quickly on another property, is selling a deceased estate or has had their property listed for a protracted period of time without generating interest, they may sell their home below market value.

Likewise, some vendors may sell a home below market value to cover a debt. For instance, if a vendor owes a sum of money to someone, they may agree to sell their creditor a property at a discounted price in exchange for forgiving the debt.

Our expert says: Speak to a professional

"Although selling below market price is perfectly fine to do, there are likely other costs involved! It's important to chat to a professional, like a conveyancer, who can talk you through any tax implications and legal paperwork for the process. "

Rebecca Pike

Senior writer

What happens if I buy a property below market value?

The obvious benefit of a favourable purchase is that you get a property for a discounted price! This comes with some pretty good side effects.

For instance, you may be able to buy property without a deposit.

This is because your home loan will be calculated on the property’s true value rather than the purchase price. In essence, you’re being gifted equity in your property.

Confused? Here’s how it works:

• You agree with your parents to buy their property for $600,000.
• When you apply for a home loan, your lender values the property at $800,000.
• In this instance, your $600,000 home loan is 75% of the property’s true value.
• You can pay your parents the full purchase price of the house, $600,000, with a loan because the bank considers the gifted equity to be a 25% deposit.

Avoiding lenders mortgage insurance (LMI)

In a scenario like this, you can avoid paying Lenders mortgage insurance (LMI), an insurance policy that covers your lender in the event you default on your home loan. LMI is required on home loans where you have less than a 20% deposit. In spite of covering your lender and not yourself, you pay the premium for an LMI policy. This can add tens of thousands of dollars to the cost of your home loan.

However, when you buy a home below market value, you may be able to avoid LMI, even if you borrow more than 80% of the purchase price. This is because, as discussed above, most lenders will calculate your loan-to-value ratio (LVR) on the market value of the property rather than the price you’re paying for it.

Just like in the example above, you could borrow 100% of what you're paying for the home, but still have an LVR below 80%.

Finder survey: What do Australians think is the biggest hurdle to getting a home loan?

What are the drawbacks of a favourable purchase?

While you’ll get a discount on the purchase price, you won’t get a discount on some of the associated costs.

Stamp duty: A government tax for the transfer of property. This will be calculated on the market value of the property, not how much you pay for it. So even if the purchase price you pay is below the threshold for stamp duty concessions, the market value may not be. In this case, you’ll still have to pay stamp duty.

First home owner grants: Favourable purchase agreements can impact your eligibility for first home buyer schemes and grants, because these are also assessed based on the market value.

Capital gains tax: If the property was bought as an investment, the seller may be liable for capital gains tax for the property’s true market value.

Reduced lender options: You'll have to apply with a lender which has a policy that supports favourable purchases. Some are more than willing to lend without a deposit, so long as the loan doesn’t exceed 105% of the purchase price of the property, but others prefer to see that you've saved a genuine deposit. If you’re looking for a home loan to purchase a property below its market value, a good mortgage broker can help you navigate the process.

<h3>Frequently asked questions about favourable purchases</h3>

• Can you sell a house for less than market value in Australia?

  Yes, you can sell a house for less than market value in Australia. Selling in a hurry or selling to a family member are scenarios where you might want to sell for less than market value - and that's totally ok! But you should be aware that the buyer will still need to pay stamp duty on the full market value of the property.

• Can I gift a property to my child?

  Yes, you can gift a property to a child or other family member. It's not quite as simple as handing over the keys however. You will need a gift deed to transfer ownership of the property. Make sure you're across all the costs that can come with gifting property.

  If the home still has a mortgage attached to it, the new owner would need to take out a loan to cover the remaining costs. The new owner would therefore need to be able to service a loan and be approved by a lender.

Written by

Richard Whitten

Editor

Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio

Richard's expertise

Richard has written 554 Finder guides across topics including:

• Home loans
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