What is a favourable purchase?
As ones parents or grandparents get closer to retirement, they may wish to sell their property to either downsize or move into an aged care facility/retirement living. Many children do not like the idea of mum and dad selling the family home so will look at purchasing the property to keep it in the family. In this case sometimes the parents will agree to sell for under market value to assist their kids financially and also with the view to keeping the home in the family.
When a property is sold for under market value to a family member, this is called a favourable purchase. Essentially what is happening is the parents are gifting equity to the child. For example, if the purchase price was $400,000 and the valuation was $500,000, the parents are basically gifting the kids $100,000 in equity.
Can you get a home loan for a favourable purchase?
Absolutely, although different lenders will apply vastly different policy on favourable purchases. These differences are best explained by way of an example. If David and Sue buy their parents home for $400,000 when it has been valued by the bank for $500,000, they have been gifted 100k in equity.
In this example, bank 1 would lend the entire $400,000 to David and Sue as well as funds to cover stamp duty and legals. This means the purchasers would not be required to contribute any funds at all to the purchase as the bank would fund the entire amount.
Bank 2 would only lend 95% of the purchase price or $380,000 and therefore David and Sue would need a $20,000 deposit plus costs.
Bank 3 will not give David and Sue credit for the favourable purchase and will require David and Sue to put in a 20% deposit or $80,000.
Bank policy here varies significantly and it is therefore important you go to the right bank to ensure your home loan is approved the first time with the best possible terms.
How does this apply to Non Resident Australians living and working overseas?
Australian citizens living and working abroad can purchase the family home and get a home loan for a favourable purchase. However, they will be limited to 80% LVR based on the higher valuation. Ie, in the above example, if the valuation was $500,000 the maximum loan is $400,000. If the purchase price is more than $400,000 then the expat purchaser would need to fund the difference out of their own pocket.
Note that this 80% LVR limitation is only a limitation for expats for favourable purchases. It does not apply to Australian expats who are doing an on the market transaction – ie, buying a house from an unrelated third party. Expats can achieve an LVR of up to 95% so only a 5% deposit is required. Please see our page dedicated to Australian expat home loans here.