Published 10 August 2014 · Last reviewed 27 November 2022 · Older article — see current rates
I want to renovate a property then use the equity to fund my next project
Recently bought a property in cash now want a remortgage but being told you need to wait six months to release the equity? Don’t fret we can get your money quicker. Read this article if you want an insight into the following:
- Remortgage of unencumbered property bought by cash
- Remortgage of auction properties
- What is the 6 month and 12 months’ remortgage rule
- Lenders that do not operate the 6 month rule
- I want to buy a property at auction but don’t have the cash – can you help?
Congratulations on owning a property mortgage free property or ‘unencumbered’ as it’s often referred to instead – it’s a nice feeling. However, if you have an entrepreneurial attitude to life you will also appreciate it can be a ‘cash cow’, as securing money against a property is one of the cheapest forms of finance. We are all familiar with the phrase ‘if only I had more money I could…’, well the options an unencumbered property present could just be your solution, particularly if you team up with a mortgage professional firm, such as Niche Advice.
The chances are if you have already bought a property in cash you have must have business acumen to make future purchases in the same vain. Cash buyers can drive bargains in the basis of ‘freeing-up chains’.
Importantly, just because you have bought in cash does not restrict you from obtaining a mortgage on the property at a later stage – it can be the best of both worlds!
Remortgage of unencumbered properties bought by cash
We have a constant stream of re-mortgage enquiries from clients who have bought their property in cash. The trouble is lenders are skeptical of cash buyers, who are often ‘property developers’, as they fear they are more astute than them (and their surveyors) to the extent they can present a property in a favorable way which disguises its underlying value. As I mentioned previously money secured against a property is cheap and the reason for this is the lender can reclaim the property in the event of non-payment and sell it quickly to get their money back. In the past their hands have been burnt as the actual sale price of properties has turned out to be far lower than they originally thought – meaning they have in fact lost out.
An example, of how lenders were ‘duped’ in the past centres around ‘new build’ property. The value of a new build is difficult to benchmark. Cash buyers in cahoots with developers were setting their own market levels. How so? Well the first property on a plot was bought at a high false level. The purchase price was then recorded on Land Registry and on the estate agents books. Then every subsequent property plot was sold at the same price. The owner then remortgaged the properties based on the inflated valuation leaving the lender unwittingly exposed to negative equity from the outset.
So the lenders set about trying to protect themselves. The first thing they introduced was the slashing of loan-to-values on ‘new builds’, particularly flats. Their trade body The Council of Mortgage lenders introduced a code of practice around disclosure of all parties involved in a sell transaction and whether any ‘purchaser incentives’ were been provided by the developer which disguised the ‘true value’ of the asset. The next measure they introduced was the 6 month remortgage rule explained below.
6 or 12 month remortgage rules for lenders
The 6 or 12 month rule relates to the period of ownership before a lender is willing to provide finance. These rules generally apply to buy to let mortgages.
What does the 6 or 12 month mortgage rule attempt to achieve? Well it slows cash flow of property developers and money launderers. Previously a property was at one price one day – and a lick of paint – the next the remortgage drawn-down was based on a higher value. It worked particular well in the event of a distressed sale purchase (where often cash buyers tread) and where house inflation is at fever pitch. The 6 or 12 month period for the lenders allows for a time of reflection in the property value. It also in theory attracts a better caliber of developer as they are not ‘hand to mouth’, i.e. needing to race to the next project to keep a roof over their heads.
Which lenders apply the 6 or 12 month mortgage rule? Virtually all of them on buy-to-lets. We do however have access to a small pocket of lenders who will look at remortgaging a property within the first month of purchase but before you get too excited they tend to use the original purchase price as their base line for lending. Within these lenders – some also shy away from ‘cash buyers’ preferring to deal with developers that acquired the property with specialist finance e.g. bridging. This is because they have already passed through one finance process which offers extra reassurance to them.
The situation is quite different on ‘residential’ purchases (your home) where the number of lenders offering a remortgage facility after day one of purchase is substantially increased and the rules are generally more relaxed. Why? Well the lender can quicker sum up whether you are moving from house to house by the credit agency register. If you are residential history is static they know you are not using the funds like a developer would so you are less likely to manipulate the property value.
I want to buy a property at auction but don’t have the cash can you help?
Yes. Traditional mortgage lenders tend to be too slow for this type of transaction. Bear in mind if you want to compete with ‘cash buyers’ you need to be nimble.
You will however need to front a deposit in the region of 25%.
At Niche Advice we can access specialist finance which is fit for this purpose. It is more like an agreed overdraft limit so you can bid with confidence. The day after the purchase we can start the process to remortgage you to a conventional mortgage (lower rate).
If you’ve recently bought a property in cash and would like to remortgage please call us on T: 020 7993 2044 or alternatively complete the enquiry form on this page.