It is possible to remortage within six months of purchase, even on a buy to let property, I promise you! Forget everything you have heard about “the CML’s six month rule”, no such rule exists!
The legend of the “CML’s six month rule” for remortgaging has been bandied around forums for at least five years now but I can assure you that no such rules exists – allow me to explain.
For as long as I can remember, and certainly well before Mortgage Express withdrew their instant remortgaging product, the CML (Council of Mortgage Lenders) and the Law Society have been advising their members to be extra diligent when mortgaging a property which has been owned for less than six months. In the previous decade (particularly 2003 to 2008) many lenders took a very relaxed approach to the guidelines and the reports they received from conveyancing solicitors. Nevertheless, conveyancing solicitors were, even then, duty bound to report to mortgage lenders any property being mortgaged within six months of the original purchase date.
History has proven that underwriting decisions made in the last decade were flawed. As soon as that became obvious to lenders the reaction was was an inevitable over tightening of lending criteria. They realised that substantial risks were associated with not following the CML’s guidelines and they over compensated by refusing to provide any buy to let mortgages within six months of the purchase date. And so the legend of the “CML’s six month rule” was created.
So why was the CML’s guidance issued in the first place and more to the point, why was it pretty much ignored by lenders for 5 years?
The latter part of this question is know well known and can be summed up in one word – GREED.
The CML’s guidance was actually issued to alert lenders of potential of risks associated with providing mortgages on properties which had been owned for less than six months. The decision to disregard this guidance cost lenders billions. Thousands of mortgage brokers, property clubs and landlords decided to take advantage of the lenders greed. Properties were purchased for cash or with bridging finance and then instantly remortgaged based on the highest valuation that a valuer was prepared to put in writing. Most solicitors did their job properly and reported that properties had been purchased within six months but lenders simply disregarded the advice and went ahead without asking any further questions.
The inevitable greed and abuse which ensued also compromised the integrity of many professional valuers. In many cases during the boom years of 2003 to 2008 whole developments were being sold to buy to let investors. It was not uncommon for six valuations to be instructed on one property. The valuer who gave the highest figure would then be instructed to provide the valuations for the all of the other units. For valuers it became a necessary risk to put their PI insurance on the line and value the properties at more than their rival firms to ensure they got the really lucrative deal of valuing all other properties in the development. It wasn’t just new build developments that were affected though, valuers soon earned a reputation of being either generous or tight and it doesn’t take a rocket scientist to work out which of these two the mortgage brokers, property clubs, landlords etc. decided to give their business to. In many cases, lenders ended up lending 100% of the true purchase price of the property, sometimes a lot more. Lenders were taking 100% of the risk or more and the purchasers were taking 100% of the profits if any were made.
The outcome of the above was that that for a while, when this all came out in the wash, all buy to let mortgage lenders simply refused to remortgage property which had been purchased within six months. Lenders also tightened up on their criteria to check that the person they were lending to really did have a financial commitment to the purchase and that the solicitor had completed all of their requirements in terms of checking for hidden incentives. This had a knock on effect though.
Several landlords buy properties at auction and arrange the mortgage after the event as it is incredibly difficult to arrange a mortgage of a property pre-auction. It’s also very rarely cost effective to arrange mortgages pre-auction as landlords tend to bid for a lot more properties than they actually purchase. Some landlords would purchase a property every month and have a little conveyor belt of a new purchases and a new mortgages every month. Not being able to obtain a mortgage after the auction effectively meant that these landlords could now only buy an additional property every six months.
Many landlords also buy properties for cash or with bridging finance with the intention of improving their value through refurbishment.
In both of these scenario’s, established operators found themselves trapped and unable to refinance for six months, even though they had done absolutely nothing at all wrong. Obviously they turned to internet forums to share their frustrations and to look for alternatives but all landlords were having the same problems for at least a few years. This further fanned the flames which fed the legend of the CML’s six month rule.
True commercial lenders didn’t have the same knee jerk reaction and continued to ‘take a view’ as they always had. They never really suffered the effects of the buy to let boom between 2003 to 2008 as they simply didn’t look attractive in comparison to the buy to let mortgage lenders at that time, hence they didn’t do much of this type of business. When landlords eventually realised this, and were prepared to accept the pricing differentials, the remaining commercial lenders (which had their own completely different set of problems) were in a position to pick and choose.
Fortunately, a lot of water has passed under the bridge since the collapse of Mortgage Express and Northern Rock.
Some lenders which has stopped lending altogether have even returned to the market, Paragon Mortgages perhaps being the most notable example.
If you purchased a property for cash or at auction it is now possible to get a mortgage for 75% of what you paid for it before six months have elapsed. Only a handful of buy to let lenders will do these deals but many more specialist lenders, who tend to deal exclusive with commercial finance brokers, are becoming increasingly active. However, be warned, if you are hoping to get a mortgage for 75% of what a valuer says the property is worth, not what you paid for it, forget it, you’re probably going to have to wait for at least six months to get that, especially if you go direct to a BTL lender. What this does mean though is that if you purchased a property at auction it it now possible to get a buy to let mortgage whereas as 12 months ago it wasn’t. If your business model is anything other than ‘vanilla’ buy to let (refurbishment, semi commercial etc.) then it definitely pays to be talking to a broker whose letterhead carries the NACFB badge (National Association of Commercial Finance Brokers). The NACFB is an independent professional body founded in 1992. it’s members are niche commercial lenders and specialist brokers. Very few financial advisers and mortgage brokers are also NACFB affiliated, there are certainly less than 1,000 of the across the UK as it’s a very specialist market and the fact that most broker business is consumer based they can’t justify the cost and continual professional development associated with being NACFB affiliated.
If you do genuinely feel that you are trapped and can’t get a new mortgage on a property purchased within the last six months you may not be, there are lenders out there looking for good business and taking a sensible approach to lending again. I also expect to see more lenders falling back to a position whereby their lending criteria will follow the guidelines issued all those years ago by the CML. We’ve seen the pendulum swing in both directions over the last decade, now it’s approaching the middle again.
If you would like to discuss a deal to see whether it is realistic to arrange a mortgage please contact my business partner, Neil Patterson on 01603 428560 or email [email protected]
PS – despite having retired from broking in 2009 we have retained our NACFB membership and we will be pleased to provide an assessment of the likelihood of your funding requirement being successful free of charge. If we think we can help we will be pleased to introduce you to an appropriate NACFB affiliated broker. All we ask in return is that you consider making a donation towards the upkeep of this forum and the services we provide. Effectively, you can pay what you think our advice is worth to you.
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