How does a Bounce Back Loan affect my mortgage application?

The more than topical question ‘How does a Bounce Back Loan affect my mortgage application?’ is all very well to ask, especially if you’re a contractor-director of your own limited company, writes John Yerou, CEO of Freelancer Financials. But first we need to set some definitions and groundwork, so there can be no confusion.

What is a Bounce Back Loan?

The Bounce Back Loan (BBL) scheme was government-backed.

It was made available to small businesses in the UK that had been adversely impacted during the coronavirus pandemic.

The BBL scheme was established on March 1st 2020, and the scheme closed to new applicants on March 31st 2022. Small businesses (including contractor limited companies) were able to apply for sums between £2,000 and £50,000.

The loan was capped at 25% of the total turnover for the business, with no requirement to make a repayment in 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 every year that the debt remains unpaid. The length of the loan is six years, but it can be repaid early without paying a fee or penalty.

Who took out Bounce Back Loans?

To qualify for a Bounce Back Loan, the requirement was that you needed to sign a declaration to state you have been impacted directly as a result of coronavirus. After all, the aim of the scheme was to inject fast cash flow into small and self-employed businesses struggling to stay afloat because of covid and/or lockdown effects.

Some small business-owners applied for a government-backed BBL to create for themselves an ‘emergency fund,’ even if their business was not in financial distress. These owners later discovered that this didn’t do them any favours when applying for a mortgage. Below, I tell you why.

BBL usage and the opportunity for misuse

Given the severe economic impact of the pandemic, the BBL scheme was extensively used by many small businesses. But not all those businesses were financially impacted as a direct result of the pandemic.

The government stated that BBL finance must be used for the “economic benefit of the business”. This is a broad, ambiguous term that could be misinterpreted. And it was.

Misuse of a BBL might include any one of the following:

• Using the funds to purchase a new personal asset (e.g., a deposit for a property,  or to buy a car);
• Transferring the lump sum to a personal bank account;
• Giving the money to a third party, such as a family member or friend;
• Funding a significant increase in director salary or dividends.

What's the impact of a Bounce Back Loan on a mortgage application?

The majority of small business-owners have been using this scheme correctly, i.e., to cope with the financial strain brought on by the pandemic.

However, as with many things, there are always a select few that will take advantage and use it for their own financial gain.

Mortgage lenders have grown wise to the exploitation of BBLs and have decided to crack down.

This is mainly due to certain people attempting to use the borrowed funds as a means to put down a deposit on a property (mainly an investment property or holiday let), instead of using it to make sure that their business stays operational, and could ‘bounce back’ with the funds.

What about mortgage lenders and BBLs?

Mortgage lenders have increased their checks to ensure Bounce Back Loans aren’t being used inappropriately (such as to fund a deposit on a property).

Lenders first like to check if you’ve taken out a BBL by carrying out a heightened background credit check.

Contractors, please note. You must declare to your mortgage adviser upfront that you have taken out a Bounce Back Loan. If a lender finds a BBL wasn’t declared at the outset, the lender can decline the respective mortgage application.

Can I get a mortgage with a BBL?

If you’ve taken out a Bounce Back Loan, you are not prohibited from getting a mortgage. The key to a mortgage lender giving you the thumbs-up is being able to show that your business was impacted by the pandemic. But you must also demonstrate that your business has recovered.

Mortgage lenders have a ‘duty of care’ and have to act responsibly and ensure that you are not taking on more debt than you can manage. Lenders aren’t opposed to people with BBLs per se. They just want to ensure that they were taken out legitimately and that they’re not being used to fund a deposit.

There are many lenders who are willing to provide mortgages to contractors with Bounce Back Loans. As long as you’re able to provide evidence that your income and circumstances can meet the mortgage repayments each month, you should be approved.

Top tips for BBL contractors applying for a mortgage

1. Use a contractor mortgage specialist – this is imperative if you don’t want to fall at the very first hurdle.
2. Declare upfront to the mortgage adviser that you have a Bounce Back Loan.
3. If you’re in a position to pay off the BBL, then do so promptly.
4. Ensure all your credit commitments are paid on time.

If you took out a Bounce Back Loan and are now unsure how it will affect you, this article should have helped give you a better understanding, and informed what will hopefully be the right decisions. But please come forward to us if you’re in any doubt. Remember, we have access to all lenders and know the ever-changing criteria that each uses to approve mortgages. So, before you second guess, pick up the phone to one of our advisers first. With the government prepared to act against BBL abusers, and lenders potentially prepared to reject applications, it could be the most important call you make all year.