Could a little known funding restriction derail your next refurbishment project?
Earlier this year, the Guardian newspaper asked its readers to nominate words and phrases which should be erased from the English language. One of the most popular suggestions was the word gobsmacked. One reader, Anna Newton, wrote that “the sheer ugliness and implied violence of the word makes me shudder with revulsion”. I couldn’t agree more.
However, when I found out last week about a little known mortgage restriction which some of the major lenders are imposing, I’m glad the word was still at my disposal. Otherwise I’d have absolutely no idea how to describe my reaction. I was absolutely gobsmacked!
We’ve all become accustomed to the funding restrictions imposed as a result of the credit squeeze… the restrictions on loan-to-value ratios, limits on the number of properties you can own, higher interest rates, increased arrangement fees, longer tie-in periods, stricter credit checks. I can appreciate the reasons behind the measures and I’ve found ways to work around the various hurdles so I can continue to invest in property despite the squeeze. Recently there have been signs that the worst may be over and that some of the rules were slowly being relaxed. But the events of last week prove that we’ve still got a very long way to go before we can hope for a return to ‘normal’ lending.
I’ve been helping a friend of mine who’s taking his first tentative steps into the world of property investment. We sourced a property in need of substantial refurbishment. We did our research, estimated the cost of the renovation work, confirmed the potential sale value, calculated the maximum amount we should pay at auction and obtained approval for a bridging loan. The big day arrived and when the hammer came down we’d successfully bought the house for substantially less than our self-imposed maximum, bagging ourselves a bargain well below market value.
The purchase went smoothly and the finance came through as agreed. The builders were on site for several weeks, transforming the house into a bright, modern, welcoming home. Soon afterwards we received an offer from a first time buyer who was already pre-approved for a Royal Bank of Scotland mortgage. Perfect. We snapped his hand off!
Solicitors were instructed. The RBS appointed surveyor approved the valuation exactly as requested with no retentions. A completion date was agreed and everything was going swimmingly. Or so we thought.
Just 24 hours before exchange we got a call from our solicitor. The RBS had just retracted their mortgage offer because – prepare to be gobsmacked! – we’d only owned the property for three months. Now it was obvious to all that we’d bought the house to refurbish and sell. The bank had appointed an independent surveyor who had valued the property to their satisfaction. Yet the bank refused to lend against the property, insisting that we’d have to retain ownership of the property for a further three months before they would approve the funding!
I’ve grown to accept the reasoning behind the ’six month rule’ when remortgaging a property but never dreamt the same criteria would be imposed for the sale of a property. I’ve been involved in property for many years and come across some strange funding requirements but I’ve never come across anything so ridiculous.
Our buyer has appealed against the decision and we’re awaiting the bank’s response. In the current market buyers don’t grow on trees so fingers crossed they have a change of heart otherwise we may have to mothball the property for three months, absorb the additional bridging loan payments and delay our next investment project.
I’ve spoken to a number of my contacts and it seems that some lenders have been implementing this six month rule for a while now. So I’m appealing for your help. I’m trying to find out which lenders impose the rule and how widespread the problem is. Have you sold a refurbished property recently? Did your buyer experience any problems obtaining finance? Which lenders were involved?
Hopefully by comparing notes we can help prevent more gobs from being smacked!
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Hi Lyndon please let us know what the answer to your appeal is – it seems a ridiculous and arbitrary restriction and to whack it on you at such a late stage is very questionable indeed. Fingers crossed they come to their senses and stop this too-late knee-jerking behaviour.
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By the way, no we have not come across this restriction – we used Northern Rock most recently who did not indicate such a restriction but we had a slightly different reason for wanting to borrow.
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Lyndon Forshaw Reply:
October 22nd, 2009 at 2:19 pm
Hi Angela,
We have since gone back to the bank or rather the buyers solicitors have, asking them to reconsider but they still refuse.
regards
Lyndon
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Hi Lyndon I am having the same problem, I have been speaking to a broker who has advised me there are other products such as the northern rock one out there which dont implement this restriction. Maybe tell the buyers to use one of these products rather than RBS? I know Barclays are imposing a 12 month restriction!!
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Hi Lyndon,
Had the same problem with a recent purchase. The builder who was selling it to me had a Birmingham Midshires mortgage and had tried to remortgage again with BM soon after buying. He’d been turned down because of the 6mo rule. Didn’t think this would apply if he sold, so after he had owned for 5mo he sold to me and I was given a BM mortgage offer. A week or so later they pulled the offer because they realised he still hadn’t owned it for 6mo. We had to wait a further month and then reapply for the mortgage but this time they didn’t just grant the mortgage offer on the basis it now met their 6mo rule- they wanted full documentation of everything and appeared to be very suspicious. Long and short of it is we’re going with a different lender now. Major hassle and waste of time and money. A good mortgage broker will be able to let you know which mortgage lenders are enforcing this and which aren’t. I should have checked ahead of time but never thought it would be an issue.
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Hi, any news on the 6 month rule in selling on refurbised property, are there any lenders who will lend to the buyer within first 6 months of being bought ?
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Lyndon Forshaw Reply:
June 9th, 2010 at 3:36 pm
Hi Steve,
There are one or two products on the market that are aimed at light refurbishment and so allow you to refinance the property within the six months. You need to source and good deal that is verified by surveyor – pre and post works – but does get around the problem.
Selling however, is still difficult within the first six months. This much depends on which mortgage lender the buyer is using but most aren’t interested within six months. I’m not sure which lenders allow this at the moment though
Regards
Lyndon
Lyndon
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