Renters’ Rights Act could drive rise in concessionary purchases as landlords look for easy exits, brokers say

A concessionary purchase is where buyers will buy a property at a discounted price. This is often an arrangement where a landlord will sell their properties to existing tenants, allowing tenants to get on the property ladder.

The discount is usually between 5% and 10% of the market value and the loan value is typically around 95% with a 5% deposit.

This kind of mortgage arrangement is expected to rise in popularity as the Renters’ Rights Act is due to come into force on 1 May, with some brokers suggesting this could be an avenue to explore with landlord clients who are looking to exit the market quicker.

According to Criteria Brain, 42 of 74 lenders listed will accept a concessionary purchase where the current owner is the landlord and the applicants are tenants.

Earlier this week, Nottingham Building Society changed its criteria to allow concessionary purchases from landlords, adding that it was seeing more landlords selling direct to tenants.

Matt Kingston, sales director at Nottingham Building Society, said that as the rental market continues to evolve, it’s “natural that more conversations are happening between landlords and tenants about what happens next when a property may be sold”.

He continued: “In some cases, that can create an opportunity for tenants who are already living in a property to explore whether they might be able to purchase it, often with a concessionary purchase arrangement where the landlord agrees to sell at a discounted price.

“If we can help the landlord move forward with their plans while also supporting a tenant into homeownership, then it can create a positive outcome for everyone involved.

“For lenders like us, who are 100% intermediated, the key to success is transparency in our criteria and consistency in our underwriting decision. In practice, that means lenders and brokers working together to clearly outline the scenario from the outset, which ultimately leads to optimal outcomes for landlords and tenants.”

‘Tougher rate tax and regulatory environment’ could lead more landlords to explore options

David Hollingworth, associate director for communications at L&C Mortgages, said that not that long ago, it “would have been hard to see why a landlord would want to sell a property at a price below market value”.

He said: “The pressure on landlords through a tougher rate, tax and regulatory environment will no doubt lead to the re-evaluation of whether some, or even all, their buy-to-let holding is working anymore. An increase in properties being sold could mean that more landlords would contemplate taking a reduced price for an easier sale where the existing tenant is keen to buy.

“The benefit to the tenant is pretty clear in reducing what they have to pay for the property and also potentially helping to limit the size of deposit they may need, as the lender will have the security of the open market value.”

Hollingworth added that there could also be benefits for the landlord, as it makes for a “quicker sale and [avoids] costs that may typically come with marketing the property”.

“What may have required a vacant period without any rental income and a need to redecorate the property may now avoid that gap. Importantly, there is the reduction in marketing costs, as it could avoid the need to go on the market altogether.

“The landlord can help out what may have been a long-term tenant, but when the costs, speed and ease of the sale are taken into account, it could actually make for a win-win. That’s likely to be particularly attractive to smaller landlords looking to reduce their holding as easily as they can,” he continued.

Brokers seeing more landlords sell to existing tenants

Paul Hampton, owner of Approved Mortgage Solutions, said it was “seeing more landlords selling to existing tenants rather than go through the no-fault eviction route”.

He explained: “The cost of following the Section 21 route and selling via an estate agent is usually larger than giving a concession of equity to a tenant. For some lenders, the concession can be as little as 5%, but 10% is the norm.

“This is something that I expect to see more of with the introduction of the Renters’ Rights Act.”

One of the measures in the Renters’ Rights Act will be to abolish Section 21 eviction notices.

He noted that lenders were “slowly responding to this” and more lenders were accepting the concession as total deposit, so that means the tenant usually only needs to cover legal fees.

“Some lenders still require the tenant to put in at least a 5% deposit from their own sources, but not all. I would say lenders’ appetite is steady but very slowly growing.

“From a borrower’s point of view, there is very little to consider. You are buying a house that know and have already chosen to live in. There is very little disruption as you are not physically moving house, and this obviously saves changing utility bills, council tax, etc,” he added.

Jason Foord, director at Verifi Mortgages, agreed that it was seeing a rise in concessionary purchases, especially where “long-term tenants have built trust with their landlord and both sides want a clean, cost-effective exit”.

He continued: “That said, I still believe the volume is lower than it should be. Many tenants assume they cannot raise a deposit, and many landlords are unaware that the discount can replace a traditional cash deposit. If a landlord intends to sell at £200,000 but agrees £180,000 to the tenant, that £20,000 can often be treated as gifted equity/deposit.

“When you compare that to selling through an agent where they typically charge around 1-2% plus VAT, that can equate to £3,000-8,000 on an average home. There could be an argument made that part of that cost could instead be given to the tenant. It can create smoother transactions and reduce rental void periods.”

Lender appetite present but valuation can be sticking point

Hollingworth said many lenders would consider concessionary purchases, although there will be a number that typically expect there to be a close family relationship between the vendor and the buyer.

Foord said lenders generally have an appetite for these kinds of deals, as long as “transaction is genuine, appropriately valued, and meets standard lending criteria”.

“However, borrowers do need to be cautious. If a landlord overvalues the property to create the appearance [of] a large discount, the lender’s surveyors may downvalue the property to true market value. If that happen, the expected discount can reduce or maybe even disappear entirely, which would mean they are unable to proceed.

“Where structured correctly, though, concessionary purchases remain a practical underutilised way to homeownership and a quick sale for landlords,” he said.

Phil Leivesley, director of mortgages at LDN Finance, said there was a “good-enough appetite from lenders here, so there is a potential cohort of borrowers who are already well-served by the market”.

“I think the big challenge lies in convincing landlords to sell their property below market value. I’ve been working on one like this recently, and I think we would definitely see more of this if the tenants themselves knew just how many lenders operate in this space.

“There are plenty who will allow a genuine discount against the market value to supplement a deposit from savings, and a few lenders who don’t require the applicant to have their own deposit at all. The challenge is that most landlords just will not countenance giving up 5% of the market value, even to a long-term tenant, particularly if the property is a flat where valuations are already a challenge,” he noted.

As an example, Leivesley said some of his clients were willing to buy the flat they’ve rented for 18 months for £540,000, which incorporated a 5% discount from what an estate agent had told the landlord was market value.

They had two surveyors visit – one gave a full market value of £500,000 and the other £480,000.