Bridging finance is a popular form of raising short-term funds for commercial property buyers, property investors and homebuyers. Bridging loans are usually acquired against the value of the property. The property kept as a security can be residential homes, shops, flats, care homes, industrial units, farmland, fitness centre or anything of substantial value. When you plan to take out a bridging loan, you may hear terms such as regulated and unregulated bridging loans. It is crucial to understand the details before you acquire a bridging loan.
First of all, regulation isn’t something that you can control. It refers to the current legislation that is governed by the Financial Conduct Authority (FCA) about different aspects of the finance industry. In simple words, FCA protects borrowers from misleading deals and incorrect advice from lenders and encourages fair competition in the regulated bridging loan. Presently, the residential finance market is regulated, and the commercial market is not.
What is a Regulated Bridging Loan? – Explained – Definition
In the UK, a regulated bridging loan means a loan that is secured against a property that is already occupied, or will soon be occupied, either by the borrower or by the borrower’s immediate family members. If someone else is going to reside in the property, you will perhaps need a buy-to-let bridging loan or mortgage.
A regulated bridging loan can be either a first charge or a second charge. That means it can be the only loan secured against the property, or if a property has equity available after the mortgage or any other type of loan, it can be placed behind the first charge loan. This type of bridging finance is regulated by FCA and has nearly the same conditions as residential mortgages.
Some aspects of regulated bridging loans are:
• They can be secured for maximum terms of 12 months
• They offer rolled-up interest options
• They have a strict exit strategy – sale of the property or refinancing are the only permissible options
• They are usually restricted to a maximum of 70% LTV
Some circumstances where the regulated bridging loan can be used are:
• Purchasing a property at the auction
• Breaking the property chain
• Renovating property you presently live or planning to move into
Can I Secure Regulated Bridging Finance for Property Development?
If you wish to develop a property, which will be your residence, then it is possible to take out a regulated loans. In that case, at least 40% of the property must be used for the residence in order to be eligible for the loan. It is commonly used to build a property from scratch on empty land or extend a garden on the existing property.
A bridging loan is said to be unregulated when the secured property is for commercial or investment purposes, and it will never be used by the borrower or any immediate family member. FCA doesn’t regulate such bridging loans, which are acquired to buy an investment property, commercial real estate or buy-to-let property.
An unregulated bridging loan is a popular way of securing funds for people willing to complete the property transaction faster. They are more flexible than regulated bridging loans as they eliminate a lot of constraints and can be customised according to the borrower’s individual needs. Just like regulated bridging loans, unregulated bridging loans can be either a first charge or a second charge.
The benefits and risks of unregulated Bridging Loans Lenders will generally offer unregulated bridging loans in circumstances, such as:
• Securing commercial or residential property quickly
• Investing in a buy-to-let property
• Buying a property at the auction
• Starting or expanding your business
• Refurbishing or renovating a property for resale
• Expanding your property portfolio
Understanding the differences between regulated and unregulated Bridging Loans
Regulated and Unregulated loans work pretty much in the same way, although the difference between them lies in how they assess application when you apply for bridging finance for business purposes. The level of protection you receive, the speed at which they can be acquired and the level at which they can be tailor-made for you are some key differences between regulated and unregulated loans.
When you secure a regulated bridging loan, you are protected by FCA, but this doesn’t necessarily make unregulated loans bad. Since they are not regulated, it can be arranged fast regulated bridging loan as there are lesser documentation and fewer proofs needed. They can also be custom-made to match the borrower’s needs. These aspects are highly desired by business owners.
Are There Any Risks Associated with Unregulated Bridging Finance?
In the UK, FCA regulates the finance market where consumers are prone to more risks. However, they do not regulate commercial finance. In fact, more than half of the bridging finance market is unregulated. Hence, this is normal in the UK.
Regulated bridging loan
s are undoubtedly a safer option, which is regulated by the FCA to ensure lenders provide clear and honest information and repayment conditions. The major concern with unregulated lenders is that the details of the bridging loan they provide may not be 100% true or complete, or they may deceive you to go for an unsuitable deal that is lucrative for them.
Hence, before securing unregulated bridging finance, it is essential to do due diligence, specifically in getting clarity on the interest rates, loan period and associated terms and conditions.
Bridging loans serve as a short-term financing solution designed to “bridge the gap” between the need for immediate funds and a more permanent financing option. These loans are typically secured against a property or other valuable asset and can be used for various purposes, such as property purchases or renovations. Borrowers who apply for a bridging loan may need to pay valuation fees to assess the value of the property, an arrangement fee for setting up the loan, and potentially exit fees upon repayment. It’s important to note that bridging loans often come with higher interest rates compared to traditional loans due to their short-term nature. To ensure consumer protection, the financial services industry in the UK, including bridging loan providers, is regulated by the Financial Conduct Authority (FCA). Bridging loans work by providing a short-term secured loan option for borrowers. The cost of a bridging loan varies based on factors such as interest rates and fees. Individuals can borrow with a bridging loan to bridge financial gaps. Borrowers can find more information about the FCA and its regulations on its official website. Unregulated agreements, credit agreements refers to finances that are not governed by the same regulations as regulated agreement, offering different levels of consumer protection.
Are Unregulated Bridging Lenders Trustworthy?
Just like regulated lenders follow FCA guidelines, renowned unregulated lenders can also demonstrate professional behaviour. There are some esteemed bodies, such as FIBA, NACFB and ASTL that recognise unregulated lenders, and create and maintain ethical standards. So, before you apply for the loan, make sure you check whether lenders are members of any associations.
The Bottom Line
No matter what type of bridging loan you are planning to take, always engage with reputed lenders who have a proven record of offering successful financial solutions. As one of the leading bridging loan providers in the UK, BridgingFinance4U offers a range of bridging solutions as well as advise on the most suitable product for you. Click to Blog