What is the six month mortgage rule?
The 6 month mortgage rule is an area of lending criteria imposed by the CML (Council of Mortgage Lenders) with the intention of stopping you from remortgaging a property within 6 months of purchase.
The 6 month mortgage rule also applies to purchases of a property that the vendor has owned for less than 6 months.
If you have brought a property for cash or you have inherited a property from a relative and you have then tried to remortgage it a few months later, you may have come up against the 6 month rule.
So why is it there, and how can you get around it?
Why is there a 6 month rule?
During the days of 100% residential mortgages and 90% loan-to-value buy to let mortgages, there was less regulation in the mortgage market. This was especially true of new build property.
Developers of new build properties offered selling agents cash which could then be passed on to potential purchasers and used as their deposit.
In addition, the property was offered to the agent at a discount on the basis they would sell many of their properties at any one time. The purchaser was given cash which was then used as the deposit.
The property was then able to be remortgaged on day 2 of ownership and was remortgaged at the full market value.
The purchaser was therefore able to get their deposit back out of the property and consequently had none of their own money tied up in the property, the risk was all the lenders.
In fact, it was so bad that there were property clubs with surveyors, brokers and builders all working together to make these deals happen.
Property was being purchased with as little as 10% deposit (even for buy to let) and was then remortgaged on day 2 at 90% loan to value of the ‘full market value’ allowing the purchaser to get their initial investment back out of the property and more.
When the market crashed in 2008 these owners were more likely to go into negative equity and to have their property repossessed, at no financial loss to the owner, as they no longer had any of their own money tied up in the property.
The outcome was that lenders repossessed property and found that it was not worth as much as the mortgage they had secured on it, and they made a loss.
It was so bad that many mortgage lenders stopped lending on what were called ‘back to back transactions’ and the 6 month mortgage rule was born.
In the case of new build, the council of mortgage lenders introduced a form that all new build developers now have to complete.
The CML form will state if any incentives have been offered to the purchaser. Lenders will only accept up to 5% of the property value in incentives towards your deposit.
Most mortgage lenders now have a 6 month mortgage rule in place, but not all.
As an independent mortgage broker, Fox Davidson have access to the whole of the market. We have spent a considerable amount of time researching the market to enable us to offer our clients many lenders that will remortgage within 6 months of purchase. We can fund property brought within 6 months on both residential and buy to let property.
Lenders that will lend within 6 months.
There are lenders that do not impose the 6 month mortgage rule.
These lenders will look at the circumstances on a case by case basis. Some will lend up to 90% loan to value or 80% in the case of buy to let and others will only offer a reduced loan to value of perhaps 60% of the new valuation.
The good news is that there are residential, buy to let and commercial lenders that will all lend within 6 months of you initially owning a property.
We will work with you to provide a full explanation to the lender that will be acceptable to them.
The issues you will have when trying to remortgage within 6 months is that some lenders will only recognize the initial purchase price and use that figure for their loan to value calculations.
If you have carried out considerable works to the property and can evidence this then we can look to build a case for working on the new property value.
How to remortgage a new build property within 6 months
Fox Davidson work with builders and developers to secure property development finance to build property.
Once a property has been built you may wish to hold the property and refinance it on to longer-term finance.
Unfortunately, some lenders will impose the 6 month mortgage rule from the date the new property is registered at the land registry.
We have lenders that will use the date you purchased the original land as the purchase date.
With most builds taking longer than 6 months you will be able to remortgage on to longer-term finance using the current valuation of the newly built property.
Buying a property owned for less than 6 months
The CML 6 month mortgage rule also applied to property that is being purchased from a vendor that has owned a property for less than 6 months.
Many mortgage lenders will not lend on the property until the vendor has owned the property for 6 months.
Fox Davidson have agreements with many lenders that will allow you to purchase a property from a vendor that has owned the property for less than 6 months.
However, if you are a property professional that buys and refurbishes property and sells within 6 months you should be aware of this rule as it can limit the mortgage options for your prospective purchaser.
Buy-to-let remortgage within 6 months of purchase
The CML 6 month mortgage rule is in place the most when it comes to buy-to-let.
As of 2018, most buy to let lenders will not remortgage a property within 6 months of ownership.
All of the mainstream lenders impose this including BM Solutions, TMW, Paragon and Godiva.
How to remortgage a buy-to-let property within 6 months of purchase?
Fox Davidson work with clients that purchase and refurbish buy to let property and that then wish to refinance the property using the increased value.
As a specialist buy to let mortgage broker we have access to many lenders that will lend within 6 months pf purchase.
You will be required to evidence the work s you have completed and can then remortgage the property using the increased valuation.