Comment: MCOB assists the self-employed

Wyles-Matthew-2017-CUT

A business-purpose exemption enables a customer to tap the equity in their home as a source of low-cost working capital

Self-employed lending is a key battleground for specialist lenders, with new entrants and incumbents jostling to stand out as the go-to solution for entrepreneurs and business owners.

These skirmishes are, however, usually one dimensional because they typically focus on ways in which a business owner can maximise income and their borrowing capacity.

But there is another dimension to self-employed lending, which is less widely understood. This is when an entrepreneur is already an owner-occupier and wants to access some of the valuable working capital trapped as equity in their home.

Within the MCOB rules there is a specific exemption designed to assist in this situation.

The business-purpose exemption enables a customer to tap the equity in their home as a source of low-cost working capital for their business, with a second charge loan that is not regulated by the MCOB rules.

In order to qualify for this exemption, the mortgage must be subordinated to a first charge at the time of drawdown; the amount borrowed initially must exceed £25,000; and the agreement must be “entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower”.

The business could be a sole trader, partnership or limited company and it is not required, for example, to be currently profitable. A lender will underwrite the individual, not the quality of the investment. However, lenders are required to satisfy themselves that the commercial purpose is genuine and it complies with the exemption rules.

Although applicants need not be employed in the relevant business, a lender would typically expect the borrower to be an existing shareholder or to use the proceeds to acquire an interest in the business.

A good example of this could be a young professional, such as a solicitor or accountant, who buys into an equity partnership.

It is worth noting that, in raising a mortgage loan using the business-purpose exemption, a customer will lose consumer status and will no longer be protected by MCOB in respect of that loan.

For many entrepreneurs, however, the positive commercial implications of a new injection of low-cost working capital are more than adequate compensation.

Matthew Wyles is executive director at Castle Trust Capital