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Mortgages with No Early Redemption Penalty are dangerous

People say that a low-cost way to get your cash back out of a property purchase is to use the small group of Buy-to-Let lenders who offer mortgages that have no redemption penalty to finance the purchase.

After you have owned the property for six months, redeem that mortgage and get a new mortgage with a different lender.  If the property can be valued at this point at more than the purchase price, you will get some of your deposit money back out to use in a new purchase.

It seems to make good sense – happy days for the investor.  The only problem is it also leads to some very unhappy lenders.

The point here is that No Early Repayment Charge (NERC) mortgages are offered by no more than a handful of lenders and they were not created to give investors a cheap way of getting their deposit out of a property.  The lenders expect borrowers to sit on them for years at a time and, amazingly perhaps, that is exactly what the vast majority of borrowers do.

Lenders think it gives a borrower the opportunity to hedge against sudden interest rate rises and switch into a fixed rate deal for example.

These lenders are aware that there is a very small, but persistent group of investors using their mortgage products as surrogate bridging and they are not happy about it.  I have spoken with more than one of these lenders and they confirm that when they uncover a borrower who shows a pattern of redeeming their mortgages within a matter of months; the borrower will be blacklisted and any future applications will be declined out of hand.  There may also be implications for the broker who submitted the case.

Why are the lenders so unhappy about having one of their mortgages redeemed after just a few months?  It most likely means that they have not even covered their costs of setting it up.  Mortgages are set up to run for years and, not unreasonably, that is what lenders expect them to do.

Most mortgages have redemption penalties in the early years; this has less to do with the lenders trying to hang onto a borrower and more to do with the lender ensuring that the cost of setting up the mortgage in the first place is covered should the borrower redeem the mortgage in the first year or two.

If you’re honest that you want the mortgage for 12 months or less your application will be refused.

You may get away with this strategy initially, but you are potentially opening a can of worms as this will be in your credit record and will attract the lender‘s attention. Once the lender has identified you as a serial redeemer, they will almost certainly not be interested in granting your mortgage application.

A better way, with no long-term damage to your credit reputation, is to use bridging finance as bridging lenders are openly providing short term lending.

This is just one aspect of understanding intelligent funding.  Find out more about how to fast-track your property investment on our Property Finance Masterclasses.


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