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Buy BMV, then remortgage at full value

THE QUESTION

A prominent member of the community has said that you can buy a property below market value (BMV) e.g. 25% BMV £150k, MV £200k) using a BTL mortgage and then remortgage six months later at MV £200k – realising the 25% difference £37.5k.

You can then use that £37.5k as a deposit for the next deal etc.

Is it actually possible to remortgage after six months at the true MV and not the actual purchase price?

THE ANSWER

The question here is not ‘can you …’, but what you are risking if you do.

With their current lending criteria, no mortgage lender is going to give you a mortgage if you are transparent about your intent to redeem within a matter of months.  That covers both selling and refinancing.

That applies regardless of whether you are happy to pay any redemption penalty applicable.

Does it happen?  Without doubt it does.  There are many investors who see being 'economical with the truth' on their mortgage application form as preferable to being transparent and getting the correct finance, as a legitimate way of reducing costs.

The point to understand here is that every mortgage transaction is listed on your credit file, every aspect of it including the redemption date. So, as you add early redemption after early redemption that is clearly visible to any future mortgage lender you will apply to for a mortgage.

What are you risking if you repeatedly apply for a mortgage then redeem it within a matter of months?  Every lender will see your track record of multiple early redemptions and consider you an undesirable borrower.

You never know when that may happen, when lenders attitudes may change and they certainly have a track record of moving goalposts on who they will or won’t lend to and under what criteria.  So your serial early redeemer status is like a Sword of Damocles, hanging over you, you never know when lenders will cease to grant you mortgages.

That a 'prominent' figure in the community is still advocating a strategy that worked better several years ago when lenders were less street smart than they are now is intriguing.

The challenge was and still is, even if you are financing it – for instance, with bridging finance – to get a mortgage lenders’ valuers mind-set away from the purchase price you paid just weeks/months previously to the value you now say the property is worth.

The point you have to answer is what have you done to notably improve the value since purchase.  The valuer knows the market in general in that area has not increased appreciably in the timeframe since purchase, so they will need to see compelling reasons to value above purchase price paid and here is where it splits into two scenarios.

  1. Just buying below value
  2. Improving the property

Doing nothing to the property in terms of improving it and relying on buying it cheaper than comparable properties will rarely, if ever, work.  Valuers do not recognise, in isolation, buying below true current value as a reason to uplift the value of a property.  You bought it cheap, so what?

What they do recognise is improvements made to the property, refurb, extend, obtain planning permission etc.  Even then it is incumbent on you to build the case for the value you have created and it needs to be robust if you are to get the full value of you uplift recognised.

This is where investors routinely fall short and suffer down valuations.  So build your case and build it well.  Relying mostly on sold comparable values (as is often the case) is unlikely to be successful; you need to be more resourceful.  Present the valuer with detailed and irrefutable evidence of the scale of your improvements.

 

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