Favourable purchases, for the bargain-loving househunters
Well it certainly isn't favourable to pay even more for the home.
Key takeaways
- Benefit from gifted equity; potentially avoid LMI on your home loan.
- Stamp duty and grants are assessed on market value not your agreed price.
- Seek professional advice for tax legal and lending complexities.
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. "
Finder survey: What do Australians think is the biggest hurdle to getting a home loan?
| Response | |
|---|---|
| The deposit | 41.55% |
| Getting approved for a loan with a good interest rate | 25.09% |
| Finding the right property | 14.12% |
| Getting a loan without typical employment | 9.35% |
| Nothing - I do not think there are hurdles | 5.94% |
| Previous debts | 3.33% |
| Other | 0.63% |
Source: Finder survey by Pure Profile of 1112 Australians, December 2023
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%.
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.
Frequently asked questions about favourable purchases
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Our house has been valued at 1.1 million and wanting to sell to son through favourable purchase at $300 000 (which is outstanding mortgage). Original mortgage was for 523 000
We will then retire and continue to live there but will be mortgage free. which is helping us while at the same time assisting him in getting into property market.
1. Will this be seen as an investment property (It is his first property)
2. Can he buy it without a deposit
Hi K,
I assume your son would need a mortgage for the $300,000? If so he’d need a deposit, unless the lender considers the full value of the property as equity and foregoes the deposit requirement. This sometimes happens. A lender might require their won independent valuation of the property first.
It’s a good idea to talk to a few lenders first to see if they’ll lend to your son in this scenario. A mortgage broker could also help, as it’s a more unusual loan scenario.
Hi,
Taking into consideration the above example, where you buy a property below market value and pay Stamp Duty on the Market Value not purchase price – what happens in the next transaction when it comes to CGT?
Example: Buy a property for $450k, with a market value of $550k. Pay Stamp Duty on the $550k. Rent the property for x amount of years, and then sell. Is the CGT calculated with a base of $450 or $550k?
Hi M,
This guide from the ATO might explain it more clearly.
The CGT is also calculated based on the market value. But I’d recommend checking with an accountant as they can give you personalised guidance.
I hope this helps.
Richard
Hi,
I am currently in the process of doing a favourable purchase with my parents investment property and trying to understand the transactions.
We currently have their property valued at $550,000 and looking to do a 15% deposit to avoid LMI with St George Bank. Therefore, the favourable purchase price is $467,500.
My question is how much will my parents receive at the end of the transaction before CGT?
Hi Raymond,
It’s hard to answer this question without knowing more details. If your parents fully own the property (no mortgage) and sell it to you for $550,000, and you have a 15% deposit, your mortgage would be $467,500. But the property would still sell for $550,000, which is what your parents would get before CGT.
With favourable purchase, you should also keep in mind that you will need to pay stamp duty on the purchase. And the government will require you to pay this on the full value of the property. This means if your parents sold at a discounted price, the stamp duty must be calculated on the property’s real value.
I hope this helps.
Cheers,
Richard