If your client is self-employed, they could use the equity in their home as a source of low-cost working capital to invest in their business.

The Mortgage Conduct of Business rules limit lenders’ ability to permit release of equity from a home. There is however an exemption in the rules which means that the proceeds from a second charge loan on a borrower’s home can be used for commercial purposes.

The regulations specify that the amount borrowed must exceed £25,000 and the funds must be destined for a legitimate business.

The lender will require a clear description of the use of the loan proceeds and would typically expect the borrower to be an existing shareholder of the relevant business or be using the loan to acquire an interest in that business.

The business for which they are borrowing could be a sole trader, partnership or a limited company and it is not required to be profitable. A wide range of purposes are permissible and could, for example, include expanding an existing business, investing in new equipment, or making an acquisition.  Similarly, funds may be used to buy into a partnership or to buy out the shares of other partners.

It is worth noting that, in raising a mortgage loan granted via the business purpose exemption, your client will give up ‘consumer’ status in respect of that particular transaction, which means that they will not benefit from the same level of regulatory protection. The lender will ask your client to sign a declaration which confirms that they understand this.

We work closely with Castle Trust, which specialises in this type of lending. Castle Trust will typically offer the funds on a fixed rate basis and this can be rolled up for payment on redemption of the loan, so there is no requirement to make monthly payments. Rates vary considerably according to the nature of the individual application but typically range from 7.49% to 9.99%.

Loans are available from 1 year to 5 years and there is no maximum age.  As every case is individually underwritten, Castle Trust is able to take a flexible approach to income and can also consider loans to expats, foreign nationals and non-doms.

If you are interested in this product, please do not hesitate to get in touch.