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If you are looking to raise capital to invest in a business, you could use the equity in your home using a second charge loan.
The Mortgage Conduct of Business rules (which were established in 2004 by the UK financial services regulator) ordinarily limit a lender’s 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 using the loan to acquire an interest in that business.
The business 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 – from expanding an existing business, to 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, you will give up ‘consumer’ status in respect of that particular transaction, which means that you will not benefit from the same level of regulatory protection. As such, a lender will probably ask you to sign a declaration which confirms you understand this.
There are two distinct solutions for this type of borrowing. The first option is for customers to borrow in their personal names and then inject the proceeds into the business as equity or debt.
Alternatively, the business itself can become the borrower, in which case the business owner will guarantee the loan collateralised with a charge over residential property – it doesn’t have to be their home. This option may be more efficient from a consolidated tax position depending on circumstances.
If you are interested in releasing equity from residential property to use for business purposes, please complete the contact form below and we will be happy to help.