There are occasions where a remortgage is needed shortly after a property is acquired. The original transaction could have been a cash purchase or perhaps an inheritance but now additional long term funds are required.
In these situations, unless you are aware of it already, you will find that obtaining remortgage finance is surprisingly difficult, with lenders quoting the ‘six month mortgage rule’. This article digs in to the origin of the 6 month mortgage rule, why it is in place and what options are available to workaround it.
What is the 6 month mortgage rule?
The six month mortgage rule is a bit like a fairy tale!
It’s a story that has been told for many years, that was based on real events but over that time has been embellished with many untruths.
The rule affects re-mortgage and mortgage applications where the target property has been owned for less than six months. In these situations many of the well known lenders will refuse the application, citing the need for six months of ownership before a new mortgage can be granted.
Some lenders even push this out to 12 months!
While we have yet to find an actual ‘rule’ that imposes these restrictions, the Council of Mortgage Lenders (CML) did issue guidance that suggested lenders should leave a gap of six months between initial purchase and any refinancing.
As it is only guidance, the final decision on whether to apply it or not rests with each individual lender. Many of the mainstream, lower risk, lenders do impose a 6 month ownership rule within their lending criteria. This starts from when the Land Registry updates the property record, not the date of completion.
Why is there a six month rule?
For the ‘why’ we need to go back in time to the heady days of the buy to let boom.
We’ll begin with a short history lesson
In 1996 the Association of Residential Letting Agents (ARLA) worked with a small group of lenders including Paragon Bank and Natwest to develop a buy to let mortgage product specifically tailored to support landlords in the private rented sector. The buy to let mortgage was born.
In the years that followed many individuals were able to become property investors and landlords due to the ease of obtaining finance. A lot of the lenders didn’t even require any proof of earnings (self-cert mortgage). Mortgage money was easy to come by and lenders offered 85%-90% LTV products and asked few questions.
The property market was buoyant and investors (and developers) became wise to the mortgage possibilities. Properties were purchased using either a mortgage or cash. Upon completion they would then submit a remortgage application, stating a higher valuation, and take out the maximum loan possible. This often allowed the investor to gain back all of the deposit monies, so they now have a free house.
New builds were a particular problem due to the lack of comparable valuations and many were sold and refinanced with inflated prices.
Things progressed to the extent that while the purchase conveyancing was taking place investors would apply for a remortgage on the same property they have yet to complete on! This allowed the minimum amount of time between purchase and remortgage, and the day one remortgage was created.
The financial crash of 2008
The financial crash of 2008 put the brakes on these practices as lenders realised how exposed they were, some going bust themselves.
The CML then recommended a six month period of ownership before refinancing was possible. Investigations also uncovered money laundering, where cash was used for the initial purchase which was then legitimised by the speedily arranged re-mortgage.
This stopped back to back transactions and slowed the market. Lenders became more cautious when assessing applications and designing products.
CONTACT A REMORTGAGE EXPERT
If you wish to investigate your re-mortgage options we can put you in touch with a fully qualified whole of market mortgage broker.
Which lenders are enforcing the rule?
The majority of the well known high street lenders will not lend within the first 6 months.
Thankfully, not all lenders observe the rule, preferring to rely on experience and common sense. They may be a little more conservative than normal when assessing these applications but competitive finance is available from a number of different lenders.
So what options do you have?
There are remortgage options available for most types of lending.
This will include:
- residential
- buy to let
- holiday let
If you do need a day-one mortgage the lenders tend to be more specialist, with some only dealing with intermediaries and mortgage brokers. They will look at the circumstances on a case by case basis. If you have completed substantial works to the property then evidence will be required if a higher valuation figure is desired.
If you need to borrow extra money to pay off unsecured debts, then this will need a Debt Consolidation Remortgage.
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The next steps
Just because a remortgage is possible within the first six months it doesn’t mean that it’s a good option or the best option. It’s important to weigh up the costs of moving from one mortgage to another, which may include valuation fees and early repayment charges.
Get in contact with an independent mortgage broker. They will have access to the whole mortgage market, which will include the specialist lenders who are happy to lend within that initial six month period.
FAQ
Frequently Asked Questions
Can you sell a house within 6 months of buying it?
Yes, there’s no minimum period of ownership.
Are these types of mortgages very expensive?
No they are not expensive. But you will find that they are dearer than a normal remortgage.
Will I have to pay any stamp duty?
There will be no stamp duty fees to pay as long as there is no change in ownership.
