How does the six-month rule work?
THE QUESTION
If I purchase a property at auction with cash or bridging finance, does that mean I don’t have to wait six months before refinancing? I’ve heard that there’s a ‘6-month rule’ that requires me to wait for that period of time.
Also can I refinance at the full market value?
Are there any work-arounds to this?
THE ANSWER
Some lenders choose to apply a six-month ownership restriction and it is specifically that, not a method of purchase restriction. It depends on whether your lender chooses to apply it, and not all do.
This means that how you finance the purchase is irrelevant, cash, bridging, whatever. Whether you bought it via an agent, auction, or direct from the vendor is also irrelevant; it is an ownership restriction, not a where you bought it from restriction.
If you start off with a mortgage and want to refinance to reflect an uplift in value, some lenders won’t accept an application until you have owned it for six months, end of.
Can you get around it? Yes, surprisingly easily - use a lender that doesn’t impose a restriction, not rocket science.
The lenders that impose it are what I term ‘Vanilla BTL lenders’, but there are plenty of other lenders, commercial, specialist, even some BTL lenders (but only at purchase price paid) that accept applications to refinance within six months of purchase.
If you want your cake and eat it - i.e. you want the cheapest rates and to be able to refinance within six months - that ain’t going to happen! A quick refinance means you are going to pay rates that are a bit higher.
Now to the bit about refinance at its 'true market value'. If you bought in an open auction room, it could be considered that you paid the true market value; otherwise someone would have bid higher than you.
If you want to refinance at a value higher than you bought at, and this extends beyond just auction properties, then you need to build a compelling case as to why the property is worth more than you paid for it.
Just buying below market value (BMV) is not going to cut it. No mortgage valuer is going to recognise buying BMV (in isolation) as a reason to value above the purchase price paid. Property values in the area will not have risen since you purchased, so they see no justification in valuing above purchase price paid.
What they will recognise is work carried out to improve the property, consequently actively appreciating the value in a short time period.
The most efficient and effective ways to overcome becoming subject to the six-month rule are:
- Buy at auction
- Use bridging finance to fund the purchase (cash also works too, obviously)
- Add value in some way, refurb, convert, title split etc.
- Apply to refinance with a lender that does not invoke a six-month restriction
Explore the Recycle Your Cash Audio and Video Training to get even more of your questions asnwered.
You can learn more here:
- Contact Kevin Wright over on his Facebook page.
- Browse the Recycle Your Cash online training library by clicking here.
- Attend an upcoming 1-Day Property Finance Masterclass event - Book in here.
