What's the Difference and Which Bridging Loan to Choose?
Bridging loans are used by consumers as a temporary financing solution while transitioning to another more permanent financial arrangement. Today we will be exploring the differences between regulated and unregulated bridging loans. Readers will gain a comprehensive understanding of the key differences and similarities, enabling them to make well-informed decisions when choosing the most suitable option for their property purchases.
Understanding Regulated Bridging Loans
Bridging loans that are regulated by the Financial Conduct Authority (FCA) are considered regulated bridging loans. A regulated bridging loan relates to securing a loan against a property that is currently, or will be, occupied by the owner or an immediate family member. The borrower must live in at least 40% of the property.
Regulation also means that consumers are protected from incorrect advice or miss-selling from lenders or brokers.
Regulated lending would apply when using a bridging loan to support the onward purchase of your main residence. When there is a breakdown in the property chain, this can cause delays to a transaction resulting in the loss of a buyer or property. If you had found your new dream home and needed to move quickly, but couldn’t sell your current residence, a bridging loan would facilitate the new purchase while you finalise the sale. Then you could repay your loan with the sale proceeds or a term mortgage.
As you would be using your main residence as security for the loan, this in turn means the property could be at risk of repossession if you are unable to meet your exit and sell your original property within the loan term. This is why it is important to consider your exit and the likely timescale required to release funds.
Regulated loans can be emotionally charged, as the transaction carries a lot of weight for the family and their personal circumstances. The additional complexity of relying upon bridging finance for the purchase of a home also means there can be additional costs and legal work to be completed before all is finalised. This is due to the associated property valuation and legal work required to initially secure the bridging finance and then repeating the process to move onto a term loan/sell.
The Benefit of Regulation
A key benefit of regulated bridging finance is the additional protection provided to the borrower by the FCA regulations. The FCA works to ensure that financial firms treat customers fairly and deliver products and services that meet their needs. Various companies fall under these regulations from banks and building societies, to companies that offer mortgages, credit cards, funeral plans, loans, savings, pensions and investments.
These authorised companies must meet FCA standards and follow their rules. All products and services on sale must meet their “Consumer Duty rules.” The Duty sets a higher standard of consumer protection in financial services.
As promoted by the FCA, everyone can get free, confidential help with money. ‘MoneyHelper’ is a government-backed service that gives guidance on a range of money matters. The team can also help you access free advice on money worries as well as pensions.
Unpacking Unregulated Bridging Loans:
For the FCA’s purposes, a contract is excluded from the definition of regulated mortgage contract if, at the time it is entered into, less than 40% of the land secured by the mortgage is used, or intended to be used, as a dwelling by the borrower or a related person; and the agreement is entered into by the borrower for the purposes of a business carried on by the borrower.
Unregulated bridging is common for the purchase of commercial premises (e.g. retail, hotels or industrial units) or investment property, such as development or conversion projects. The benefit of bridging finance is that funds can normally be obtained within a restricted timescale, such as for an auction purchase, where completion is required within 28 days. Bridging finance also offers flexibility around the property type and condition and this arrangement may be more suitable than a mortgage, if funds are only needed for a short period of time e.g. 12 month term.
When you are entering into an unregulated bridging loan, it is for you to complete your own research and be confident that this is the best decision for you and your investment goals. As FCA protection is not offered for these transactions and firms can operate outside of the FCA regulations, you need to ensure you are using a reputable company with good values and scrutinise all terms and contracts thoroughly.
Seeking Advice from Financial Experts or Mortgage Brokers
Regardless of your bridging requirements, it is beneficial to seek advice from a qualified financial expert when acquiring your bridging loan. Whether you require a regulated or unregulated product, an advisor will be best placed to identify your needs and recommend a product and lender that aligns with your current goals and financial needs.
An advisor will be familiar with trusted companies they have worked with previously and aware of the likely caveats and discrepancies that can arise with bridging terms.
At BIG Property Finance, we currently offer exclusively unregulated loans. We are happy to support the purchase of residential property, however this must be for investment or business purposes and no property must be intended for occupancy by the borrower or their family.
