Bounce-back loans “bounced back” on landlords

Landlords who took out bounce-back loans to keep their businesses afloat during the lock-down period, often in trouble with zero rent being paid, now face being refused mortgages.

The loans have been offered to businesses during the coronavirus crisis when they have lost vital revenue needed to keep their firms afloat and staff on the payroll.

The scheme has meant that businesses can borrow up to £50,000 interest-free for the first year of operation before payments kick-in at an interest rate of 2.5 per cent.

The generous Government scheme has resulted in some major controversy in the property investment community however. Some controversial “millionaire property guru” characters, the likes of Paul Smith and Samuel Leeds, have been running property training courses for amateur property investors and have been encouraging them to apply for the government loans to fund their property purchases.

However, investors are being warned that anti-fraud organisations and white-collar crime experts have raised significant concerns about the potential for loss to the public purse as a result of fraudulent claims for Coronavirus bounce-back loans. These property investment claims are clearly not what the Government intended the money to be used for and they leave claimants open to prosecution.

One landlord posting on the property Blog, Property Tribes, said he had received a £12,000 bounce-back loan when one of his properties came vacant during the lock-down, while another of his tenants was unable to pay rent.

The loan was taken out as a “precautionary measure” in case other tenants missed payments the landlord said, despite having a healthy bank balance. But when the landlord came to apply to remortgage one of his properties with Paragon Mortgages, so that he could release some equity, he was rejected.

The landlord said that:

“The mortgage was denied because they determined that the business was in financial difficulties as it had to rely on a bounce-back loan, even though my balance remained well in excess of the balance of the loan.”

In another case a landlord’s application was rejected by The Mortgage Works, part of the Nationwide Building Society, because the applicant had taken out a £27,000 bounce-back loan.

Richard Ignatowicz, a landlord and mortgage broker, told The Sunday Times:

“The lenders are taking the prudent view, and I agree, because landlords are expected to have at least three months of cash reserves to cover for typical eventualities like voids, maintenance and repairs. If you applied for a bounce back-loan, you had to declare that you have been financially affected by the coronavirus, so why would lenders lend to someone in financial distress?”

Other lenders are refusing to approve mortgage applications for landlords when they have taken mortgage payment holidays, again an indication to the lender that they have cash-flow issues. Lenders are very sensitive to borrowers who show signs of financial distress and so they have every right to do so.

Mortgage consultant Chris Sykes from Private Finance told the Sunday Times:

“Lenders can be picky in terms of who they lend to because it is their money. By the end of the year, perhaps lenders will be open to these clients again, but things aren’t back to normal yet.”

And Paragon said:

“We would not turn down an application purely because of a bounce back loan. As a prudent lender we take this into account as part of the overall credit assessment.”

The Mortgage Works said:

“If someone had a bounce back loan, it would be considered as part of the mortgage application. It isn’t a straight decline just because they have had such a loan.”

Speaking about the use of bounce-back loans to fund new property purchases Cyril Thomas, who heads up the Property Investors Bureau, told LandlordZONE:

“We would not encourage investors or individuals to do anything in breach of the terms of their loan – I don’t want to get into the moral maze of what these loans should or shouldn’t be used for, but to keep it factual.

Blog Post from Landlord Zone

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