John Grant, operations partner, at property site Property Angels International warned several of his clients have been encouraged to consider ‘double dealing’ and clarified this is mortgage fraud.
To double-deal, a buyer instructs two separate solicitors to obscure the fact a bridging loan is the source of the buy-to-let mortgage deposit. The buyer puts in an offer on a heavily discounted property. Then he or she asks the first solicitor to borrow against the full market value, not the discounted price, from a mortgage lender.
Next, the buyer receives the bridging finance and pays it to the first solicitor to put down the minimum 15% deposit on a buy-to-let mortgage for the full open market value. When the purchase completes, a second solicitor returns the difference between the discount and the real open market price from the seller to the buyer covering the bridging loan.
“In effect, the mortgage lender has provided a 100% mortgage to the buyer,” said Grant.
Top buy-to-let lender BM Solutions confirmed all deposits must come from a borrower’s own resources, making funding from a loan “unacceptable.”
A spokesperson said: “Currently, BM Solutions’ buy-to-let products require a minimum deposit of 25%. This deposit must come from the applicant’s own resources.”
Aside from the issue of fraud, professional liability also remains a concern if the solicitor, broker or introducer know the bridge is being used to fund a residential deposit.
David Bridge, managing director of bpl solicitors, said with the two solicitor model, the first solicitor is almost certainly not doing something wrong acting for a purchase using a bridging loan.
However his innocence looks doubtful if he knew the intention was to remortgage straight away using another solicitor to repay the bridging loan, or if he knows that residential loan will be based on a higher value than the purchase price, said Bridge.
However, the second solicitor should notice and must declare the property has been owned for less than six months, to comply with the rule designed to prevent property flipping.
The six month rule has been a longstanding safeguard against back-to-back transactions and fraud, said lender trade body, the Council of Mortgage Lenders.
The CML said: “For at least 10 years, the CML Lenders’ Handbook has contained an instruction for conveyancers to inform the lender if a property has been owned for less than six months. This is to prevent back to back transactions and is one of many controls lenders use to assess the likelihood of fraud.”
Bridge added: “If the intermediary is aware and fails to disclose the remortgaging deposit is a bridging loan, he can also probably be held professionally liable.”
