Some measures to prevent fraud and an underlying aversion to profiting from property transactions may be prohibiting lenders from getting deals done, according to mortgage expert and Director of HCM (Northern) Limited Grahame Harwood.
Grahame explains exactly why…
I have no doubt that a good few people within the property finance industry are familiar with the six month rule. For those who haven’t come across this, the Council of Mortgage Lenders’ Handbook requires that conveyancing solicitors report any transactions where the property being purchased has been owned for less than six months by the current owner (vendor).
This rule is in the CML Handbook so that lenders may double check all of the facts and figures. In a situation where a property has been owned for a short period prior to being sold there is potential for fraud. Prior to the credit crunch in 2008/09 many lenders chose to ignore the six month rule. As a result there are numerous cases where property valuations have been inflated to the ultimate detriment of lenders.
It is now the case that the vast majority of lenders are now rigidly adhering to the six month rule contained within the CML Handbook. And irrespective of whether the property valuations stack up, lenders will not entertain a mortgage application until a property has been owned for at least six months.
However, there is at least one exception. This occurs when a lender states that there shall be no increase in the property price. The vendor would therefore be required to sell the property at the exact same price they paid for it. This approach certainly deals with eradicating potential fraud via inflated property valuations. The ‘about turn’ by lenders over the last few years has certainly been to the advantage of bridging loan providers.
It seems that there may still be a way to make an honest living from buying a property at a genuine discount and selling it on. For instance, it isn’t a crime to make a profit. Therefore, even if a lender states that a property owned for less than six months must be sold without any increase in value, there is still the potential to charge a finder’s fee. This is true for the lender that is the exception, who does not specifically state that a finder’s fee must be reported. In contrast, all of the residential and buy-to-let lenders within the Lloyds TSB Group would specifically require the reporting of finder’s fees, and if a finder’s fee is being paid none of these lenders will provide a mortgage.
Will any lenders, commercial or residential, be prepared to stand up and lend against a genuine open market value where a property has been owned for a short period – less than six months – and there is genuine reason as to why the sale price is greater than the acquisition price?
There are many budding ‘buy-to-let’ investors interested in property as an investment vehicle. Yields on property in respect of rental income combined with the prospect of future ‘real’ capital growth makes property a very attractive investment at present (real capital growth: growth in line with or greater than inflation).