What is the 6 month rule?
The 6 month rule is generally found when either buying a new property, that’s been owned less than 6 months by the vendor of the property, or where you are looking to refinance a property you have owned for less than 6 months.
Whilst the two issues might seem related, the reasoning and options available as a result are very different.
Buying a property that the vendor has owned for less than 6 months
There are a number of circumstances where this might be a factor. If you’ve ever seen any adverts for “we buy your house for cash” this is likely one of the main reasons you might come up against this. These firms target people who for whatever reason need to get out from under a property or mortgage fast and will offer a low value but offer fast cash. Without getting into the dubious nature of such an organisation and the tactics they might employ, they will generally look to move the property on at market value as quickly as possible. One of the reasons that lenders will often prohibit such a fast change of hands relates to insolvency and bankruptcy law. An official receiver can take back assets that have been sold cheaply, or related debts that have been repaid 6 months prior to the insolvency proceedings and as a result lenders are at risk of having assets they have secured a loan against being taken off you, and therefore them. Hence the 6 month rule.
However whilst this is a factor, there are at least 30 lenders who will accept or consider such a situation out of perhaps 80 mainstream UK mortgage lenders, and so the options are still good provided they can conduct some extra due diligence and confirm there isn’t a significant risk.
Re-mortgaging a property owned for less than 6 months
Why is this a problem?
The reason that lender are cautious in this scenario is because of the opaque nature of the valuation itself. The textbook definition of “value” is what two people at arms length (i.e. that don’t have a relationship of any kind) agree to sell and buy an asset for. The way that lenders assess the “value” of your property is to compare it to what others agree for similar property, usually within 3 months and within a quarter mile radius i possible. They will look for comparables. Now imagine if you saw that next door bought their house for a certain price and the two houses are essentially the same, would you want to pay anymore than your neighbour? Your future buyers might also use the same approach and so the value of a property is relative to the value of surrounding properties. The issue is that whilst the asking price might be advertised online, and the actual sale price is only reported by estate agents voluntarily, the only true source of information is the land registry which can take months to be updated. The 6 months rule is to ensure that when a property value is assessed there is sufficient time to reflect its true purchase price on the Land Registry.
The reason this became such a concern was that during the credit crunch circa 2008, the practice of buying a property for one price, and then re-mortgaging it for another higher price on the same day was widespread. Investors were using a loophole that allowed them to buy a house for £85k, as an example, tell a remortgage lender it was worth £100k, that they were putting a £15k deposit down and then walk away with a mortgage at 100% of the property value. This all came to a head when the economy crashed and lenders started to repossess and discovered their security was never worth anything close to what it really was. Hence the 6 months rule.
Had they known there was an agreed sale at £85k then they would never have agreed with a valuation of £100k…
Why would you want to remortgage immediately after you purchased?
This is by far the most common situation we come up against, and the reasons for doing so generally dictate how much of an issue this is. It usually falls into two categories:
You want to buy cash to get a better price, to transact swiftly or simply because its easier. If this is the case the options are good. There are many lenders who are happy to refinance on day one with one important caveat:
The valuation will always be the lower of the purchase price or the market valuation.
Again if you bought at £100k, and even if you think the house could sell again for £150k, it doesn’t matter, you will only be able to remortgage for the purchase price and therefore they prevent that lack of transparency leaving them without suitable security. If this is the scenario then the system works well and if you have the cash available you can likely get a great price, or secure a property at auction, and raise a mortgage after completion, as long as you are happy borrowing 75% of what you paid, rather than what its worth.
What about where I want to add value?
Here’s where we get to the interesting part. Lets imagine you’ve bought a property at auction. It was at auction because it was largely unmortgageable, but you plan to improve and let the property out. You would have a few options, you might buy it cash, or you might use an expensive bridging loan. Tying up that much cash is going to be troublesome and will slow your ability to purchase and improve property. Buying with a bridge is expensive and having to wait 6 months where you might only need 2 months to improve a property is frustrating.
Obviously the most economical answer is that a) you simply accept the delay, if you have sufficient cash reserves then this is likely optimal, after 6 months we refinance and can use the market value and potentially refinance for enough to mostly cover the purchase and redevelopment, leaving you a very lucrative way of moving that money forward. b) You factor the 6 months bridging costs and decide if the deal still works whilst paying circa 1% a month for at least 6 months. Typically though, there needs to be a very high margin to make these costs worth while and competitition is fierce for these opportunities.
There is a solution that might be useful however for scenarios where the above two options are neither feasible or appealing. There are hybrid bridge/BTL mortgage products, often referred to as refurbishment mortgages, or light refurb mortgages. They work as follows:
- You apply for a bridge, but supply a schedule of works to the surveyor
- The survey results in 2 values, the market value in its present state and the market value if you do what you propose on the schedule of works.
- If those numbers are agreeable, you complete, and start work. You can request a revaluation at any point, it could be 3 weeks or 3 months.
- If the surveyor agrees the work has been completed as required then they move the bridge to a mortgage product, and often will advance funds over and above what was initially invested.
So where’s the catch?
Generally its the cost. The initial bridging terms are quite competitive typically, but the longer term mortgage deals are often more expensive than you might get on the open market. We can of course weight up the relative costs of 6 months or more of bridging finance followed by some years at a fixed rate on the wider market with the cost of the hybrid arrangement, but it very much depends on the property, the work required, the speed at which you can complete it and the cost of this work and the labour involved. Every deal will be different, but know that we are experts in this field, can walk you though all the costs from 100+ BTL lenders, 30+ bridging lenders and those that offer the hybrid solution and tailor our advice to your need and the specific property.
