The more than current question ‘How does a rebound loan affect my application for a mortgage?’ is very good to ask, especially if you are an entrepreneur-director of your own limited company, writes John Yerou, CEO of Independent finance. But first we need to define some definitions and prepare the ground, so that there is no confusion.
What is a bounce loan?
The Bounce Back Loan (BBL) program was supported by the government.
It was made available to small businesses in the UK which had been affected by the coronavirus pandemic.
The BBL scheme was created on March 1, 2020 and closed to new applicants on March 31, 2022. Small businesses (including LLCs) could apply for amounts between £2,000 and £50,000.
The loan was capped at 25% of the company’s total turnover, with no obligation to repay the first year of the loan.
Interest on the loan was waived in the first year; thereafter, an annual interest rate of 2.5% is charged each year the debt remains unpaid. The term of the loan is six years, but it can be repaid early without paying any fees or penalties.
Who took out rebound loans?
To qualify for a Bounce Back loan, the requirement was that you had to sign a statement stating that you were directly affected by the coronavirus. After all, the goal of the program was to quickly inject cash flow into small businesses and freelancers struggling to stay afloat due to the effects of covid and/or lockdown.
Some small business owners have asked a government-backed BBL to set up an “emergency fund” even if their business was not in financial difficulty. These homeowners later discovered that it did them a disservice when applying for a mortgage. Below, I tell you why.
Use of the BBL and possibility of abuse
Given the severe economic impact of the pandemic, the BBL program has been widely used by many small businesses. But not all of these companies have been impacted financially as a direct result of the pandemic.
The government has said BBL funding must be used for the “economic benefit of the business”. This is a broad and ambiguous term that could be misinterpreted. And it was.
Misuse of a BBL may include any of the following:
- Use the funds to buy a new personal asset (for example, a deposit for a property or to buy a car);
- Transfer the lump sum to a personal bank account;
- Give the money to a third party, such as a family member or friend;
- Fund a significant increase in directors’ salaries or dividends.
What is the impact of a Rebound Loan on a mortgage application?
The majority of small business owners have used this scheme correctly, i.e. to cope with the financial pressure caused by the pandemic.
However, as with many things, there are always a select few who will take advantage of it and use it for their own financial gain.
Mortgage lenders became aware of BBL exploitation and decided to crack down.
This is mainly because some people try to use borrowed funds as a way to put a down payment on a property (mainly an investment property or a vacation rental), instead of using it to make sure their company remains operational and could ‘bounce back’ with the funds.
What about mortgage lenders and BBLs?
Mortgage lenders have increased their checks to ensure that rebound loans are not used inappropriately (such as to finance a deposit on a property).
Lenders like to first check if you have taken out a BBL by doing a thorough credit history check.
Contractors, please note. You to have to Declare beforehand to your mortgage adviser that you have taken out a Credit Rebond. If a lender finds that a BBL was not originally declared, the lender may decline the corresponding mortgage application.
Can I get a mortgage with a BBL?
If you have taken out a bounce loan, you are not prohibited from getting a mortgage. The key to getting a mortgage lender to give you the green light is being able to show that your business has been impacted by the pandemic. But you also need to demonstrate that your business has recovered.
Mortgage lenders have a ‘duty of care’ and must act responsibly and make sure you don’t take on more debt than you can handle. Lenders are not averse to people having BBLs per se. They just want to make sure they were withdrawn legitimately and are not being used to fund a deposit.
There are many lenders who are willing to provide mortgages to entrepreneurs with rebound loans. As long as you are able to provide proof that your income and circumstances can cover mortgage payments each month, you should be approved.
Top tips for BBL entrepreneurs applying for a mortgage
- Hire a contractor mortgage specialist – it’s imperative if you don’t want to fall at the very first hurdle.
- Declare to the mortgage adviser at the outset that you have a bounce loan.
- If you are able to repay the BBL, do so quickly.
- Make sure all your credit commitments are paid on time.
If you have taken out a Bounce Back loan and are now confused about how it will affect you, this article should have helped you better understand and inform you of what will hopefully be the right decisions. But do not hesitate to contact us in case of doubt. Remember, we have access to all lenders and know the ever-changing criteria each uses to approve mortgages. So before you guess, first pick up the phone from one of our advisors. With the government ready to act against BBL abusers and lenders potentially ready to reject applications, this could be the most important call you make all year.