Bridging loans have gained significant traction in the UK property market, providing a quick funding solution for a huge range of situations.
But what exactly are they, and are they subject to any regulation or protection?
This guide will demystify bridging loans, explaining how they work, the role of the FCA, and how to understand the various options available.
The Key Question: Regulation
Some bridging loans in the UK fall under the watchful eye of the Financial Conduct Authority (FCA), while others don’t. It’s important to know which is which, as it impacts the level of consumer protection you receive.
Understanding Bridging Loans
Bridging loans offer a flexible financing solution for property transactions. These short-term loans provide quick access to funds, allowing you to seize opportunities or overcome temporary financial gaps.
Definition and Purpose
A bridging loan is a short-term loan designed to ‘bridge’ the time gap between a financial need and a permanent solution. Its primary purpose is to provide quick funding for property purchases or renovations.
You might use a bridging loan to:
- Buy a new property before selling your current one
- Purchase a property at auction
- Finance property renovations or developments
- Prevent a property chain from collapsing
These loans will have higher interest rates than traditional mortgages but offer faster approval and more flexible terms.
Types of Bridging Loans
In relation to consumer regulation, bridging loans come in two main types:
Regulated bridging loans
These are secured against your primary residence or a property you intend to live in. The Financial Conduct Authority (FCA) oversees these loans to protect consumers. The maximum term for a regulated loan is 12 months.
Unregulated bridging loans
These are typically used for commercial properties or buy-to-let investments, properties that you do not live in. They offer more flexibility but less consumer protection, readily available as 75% bridging loans and 80% LTV bridging loans.
Loan terms are more flexible and you can have a bridging loan for 3 – 24 months.
You can also choose between closed and open bridging loans. Closed loans have a fixed repayment date, while open loans offer more flexibility in repayment timing.
FCA Regulation in the UK
The Financial Conduct Authority (FCA) plays an important role in regulating secured loans and mortgages in the UK.
Role of the Financial Conduct Authority
The FCA is responsible for overseeing financial services in the UK, including certain types of bridging loans. Its primary objectives are to protect consumers, enhance market integrity, and promote competition.
The FCA took control of all aspects of bridging loan regulation in April 2014, leading to significant changes in the industry.
The authority sets rules and guidelines that regulated lenders must follow. These include strict lending criteria, transparency requirements, and fair treatment of customers.
By enforcing these regulations, the FCA aims to ensure that borrowers are not exposed to unfair practices or excessive risks.
Regulated versus Unregulated
Not all bridging loans fall under FCA regulation.
Regulated bridging loans will involve residential property where the borrower or a family member will reside, either now or in the near future.
These loans must comply with FCA rules, providing greater protection for consumers.
Unregulated bridging loans, on the other hand, are primarily used for commercial purposes or investment property transactions.
While not overseen by the FCA, these loans still operate within a legal framework. They offer a lot more flexibility and there’s a greater choice of lenders.
It’s not possible to ‘choose’ whether the loan is regulated or not. Your specific circumstances and the purpose of the loan will determine which type should be used.
Consumer Protection Measures
The FCA has implemented various measures to safeguard consumers in the bridging loan market.
These include:
- Mandatory affordability assessments to ensure borrowers can repay the loan
- Clear and transparent disclosure of terms and conditions
- A complaints procedure and access to the Financial Ombudsman Service
For regulated mortgage contracts, including certain bridging loans, lenders must adhere to responsible lending practices. This includes assessing the borrower’s ability to repay and considering acceptable repayment strategies. These additional protections will lengthen the application and approval process.
Loan Security: Your Home
If a bridging loan is deemed to be regulated then your home is at risk.
The bridge lender will take a legal charge over your property, which is formally registered at Land Registry. Because of this, if you fall behind with the repayments then the lender can start proceedings to repossess (and sell) your home.
These loans can be set up as a first charge, where they are the only secured lender, or as a second charge. For bridging situations a second charge bridging loan is quite common.
It essentially means that you already have a debt attached to your home, probably your main mortgage, this is known as a 1st charge. The bridge lender will accept a 2nd charge, standing ‘behind’ your mortgage company in terms of priority.
Eligibility
Your eligibility for a regulated bridging loan depends on several factors. Lenders assess your ability to repay the loan, considering your income, assets, and existing debts.
Importantly, you must also have sufficient equity in the property to qualify. Short-term lenders can go to 80% of your homes value, less what you owe on it already.
Read more: Do You Need a Deposit for a Bridging Loan?
The purpose of the loan is also important. Regulated bridging loans are typically used for:
- Purchasing a new home before selling your current one
- Helping with a broken property chain
- Renovating a property you plan to live in
- Raising funds quickly for personal use
Lenders will conduct thorough credit and affordability checks to ensure you can manage the loan repayment. Your credit history will be reviewed, but a perfect score isn’t always necessary.
Some lenders may require proof of income, while others might focus more on the property’s value and your exit strategy.
Who offers them?
The vast majority of bridging loans are arranged by specialist bridging finance brokers. And much of these loans are from specialist lenders and smaller banks.
Related: Bridging Loans: Are High Street Banks Still in the Game?
Mortgage Lenders versus Bridging Lenders
Both lend money, both need a property for security, but they work in very different ways.
Bridging lenders specialise in short-term property finance, whilst mortgage lenders focus on long-term loans. Bridging lenders offer faster approvals and more flexible terms, catering to urgent property transactions or renovations.
Mortgage lenders, on the other hand, provide traditional long-term financing for property purchases. They will have stricter lending criteria and longer approval processes.
Both types of lenders may be regulated by the Financial Conduct Authority (FCA), depending on the nature of their loans and the properties involved.
The role of a finance broker
It’s fair to say that the world of bridging finance is not always consumer friendly, and it can be difficult to understand what type of loan you actually need.
One of the reasons behind this is that most of the lenders don’t want to deal directly with borrowers, at least not from the start.
They prefer to rely on their network of brokers to talk to prospective borrowers, educate them on the various options, discuss the costs and fees and make sure that they are a suitable customer.
For this reason, lots of bridging providers are hard to find.
But it’s not so hard if you use a specialist broker.
It’s their job to know the lenders, their rates, their terms and the type of loans that they provide.
Bridging lenders are known to work swiftly and give fast lending decisions. To do this, they need the help of brokers to get all of the essential information together right from the start.
So if you want a bridging loan, please call us on 0330 030 5050 and we will put you in touch with a specialist bridging broker.
In summary, bridging loans offer a valuable lifeline for secured borrowing, but it’s essential to be aware of how regulation affects them.
Whether you’re buying your dream home or purchasing an investment property, understanding the distinction between regulated and unregulated loans, along with their associated risks and protections, can help with your decision making.
Remember, expert advice from a broker will make all the difference in securing the right financing solution for your needs.
