If you have all of the necessary capital to hand and want to buy a property in cash, you might assume that without the hassle of getting a mortgage, it’ll be a simple transaction. However, from our experience, cash buyers can still be caught out by some common pitfalls and it’s best to be aware of these before you begin – especially because there can be significant material consequences for cash buyers later down the road.
Why do people want to buy in cash?
It’s common for people who think, “I’m going to buy a property in cash” to have one main incentive in mind: a speedy transaction. Cash buyers want to win the deal and get the property over other prospective buyers, those who must go through the lengthy process of securing their mortgage. The hope is that cash buyers can also secure themselves a preferable financial outcome – a lower purchase price – because they can promise the seller a quick transaction without the risk of a mortgage falling through.
What do cash buyers need to know?
Before you buy
Get a survey
If you’re not buying the property with a mortgage lender, you’re not going to be subjected to as much scrutiny on the transactional front. When you get a mortgage, the level of testing on the property that a mortgage lender does is significant and important. This is for good reason, and we would advise anyone against buying a property in cash, without getting at least a basic mortgage survey done.
Undertaking a mortgage survey means that the lender will examine things you (and even your solicitor) might not think of, because they’ve seen it all: endless mortgage transactions in every situation you could dream of. Lenders have the knowledge and experience to look out for a wide spectrum of possible issues.
So, the first thing that cash buyers should do is get a thorough survey on the property, or at the bare minimum, get a mortgage survey.
Check mortgage history
Here at HCM, we are very conscious of the fact that some properties are simply deemed to be unsuitable for mortgage lending. Often, these properties appear normal from the pictures, but after some heavy scrutiny by the lender, they can sometimes be declared ‘nil value’ in terms of suitable mortgage security.
Therefore, we recommend that that buyers ask their solicitor to check the property and its history, to confirm that the property has been deemed suitable for a mortgage in the past, perhaps by asking for a former mortgage statement. There could be numerous problems that aren’t obvious otherwise, such as shared access rights, a faulty roof or damp problem that’s hidden from the naked eye. This is a downside if not dealt with properly: imagine you buy somewhere and then five years later want to sell but are unable to because people can’t take out a mortgage on it!
Once you’ve bought
Once you’ve bought the property, in cash, there’s a number of issues that could arise after and cause problems.
We see people wanting to buy property in cash but with the plan to remortgage immediately and get their cash back. The problem is that generally speaking, mortgage lenders won’t allow this to happen for at least six months after the purchase. This situation is known as a day one remortgage and lenders don’t allow normally it; they will want you to hold onto your new property for six months before remortgaging. So, don’t expect to be able to get your cash back quickly!
When the time does come to remortgage, it’s a good idea to use the same solicitor that you initially used to purchase the property. This makes things much simpler when the bank is looking at your finances and where the money to buy the property originally came from.
When you remortgage a property that has no debt on it, it’s technically known as an unencumbered remortgage. All the cash that’s been raised is a capital raise in itself, because you’re not raising it to pay off an existing mortgage. So, the question will be asked, “Why are you raising the cash,” and the bank will want a very detailed answer!
You might think that the answer is obvious: you’re raising money to replace the savings that you had before you bought the property. Unfortunately, most mortgage lenders do not allow this. The reason is that banks are scrutinised under the Financial Conduct Authority’s (FCA) ‘responsible lending’ policy. Banks must prove to the FCA that when they are lending money, it’s being used in a sensible and transparent way and there is tangible proof of this. Replenishing savings is not reliable because who knows what those savings are being used for. It could be to pay off a gambling debt, or a tax bill, or to pay legal fees in a divorce battle, all of which are generally not allowable uses to lenders.
Proof of funds
If you are allowed to raise capital to replace savings, you will still need to prove that you had those savings in the first place and where those savings came from. So, even if you have bought in cash and are allowed to remortgage after six months for the purpose of rebuilding your savings, the bank will ask you, “Show us where you got the cash from originally to buy the property,” and you should be prepared to answer the question!
The property value
If you’re planning to remortgage after buying in cash, lenders will be very cautious about the value you’re remortgaging at. Let’s look at a working example:
You buy a property in cash at £500,000 and try to remortgage it six months later at £600,000; this is going to be met with apprehension by lenders who assume you’re manipulating them to benefit financially yourself.
Ultimately when you remortgage, the surveyor will visit the property to assess the true value of the property. You may have overpaid or underpaid for the property. In the example above, you might have paid £500,000 and be trying to remortgage for even more, when in reality, the property is only worth £450,000.
Our suggestion would be to remortgage at the same price, and to use a surveyor to provide an accurate figure, too. Do not try to antagonise the mortgage lender by overpricing! Generally speaking, internal cosmetic improvements will not increase a home’s value. Even if you think your home is in far better condition than when you bought thanks to brand new flooring, freshly painted walls, state-of-the-art bathroom facilities and built-in appliances, this won’t usually result in a higher valuation. In our experience, it’s only construction work such as an extension, converting a garage or adding a conservatory that will cause the house price to increase.
We have seen plenty of people who’ve bought in cash without getting a survey, because they didn’t realise the importance of getting one, and they’ve had problems when it’s come to remortgaging.
How can HCM help?
Although cash buyers aren’t looking to secure a mortgage, we are still in the position to help. Speak to us first to make sure you’re aware of the process and to know that you obtain all of the necessary paperwork before buying.
For more information get in touch here and we can help to get you started.
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The information contained in this article is accurate at the time of writing, based on our research. Rules, criteria and regulations change all the time and so please speak to one of our Consultants to confirm the most accurate up to date information. Nothing in this article constitutes financial advice. You understand that by clicking any external links on this page that you will be leaving the website of Holiday Cottage Mortgages and we cannot be held responsible for the content of this external website. Please always consult your accountant or solicitor for all financial, taxation or legal matters.