Are you considering a bridging loan? If so, you need to understand the difference between regulated and unregulated loans.
Bridging loans are a type of short-term finance that can be used to bridge the gap between two property transactions. They can be useful for investors, developers, and homeowners, but choosing the right type of loan for your needs is important.
This article explains the key differences between regulated and unregulated bridging loans. I’ll cover the level of protection offered by each type, the implications for your situation, and how to choose the right loan for you.
By the end of this article, you’ll clearly understand the different types of bridging loans and how to choose the right one for your needs.
|Feature||Regulated Bridging Loans||Unregulated Bridging Loans|
|Regulation||Regulated by the FCA||Not regulated by the FCA|
|Consumer protection||Higher level of protection||Lower level of protection|
|Information||Lenders must provide clear information about the terms of the loan||Lenders may not be required to provide clear information about the terms of the loan|
|Best interests of clients||Lenders must act in the best interests of their clients||Lenders may not be required to act in the best interests of their clients|
Compare market-leading bridging loan quotes with no obligation
- Loans from £20,000 to £30m plus
- Max 75% LTV first charge 70% second charge
- Secured on Residential and Commercial property
- Adverse credit considered
- Both Regulated and Non-Regulated Bridging Loans
- Regulated Bridging Loans
- What is an Unregulated Bridging Loan?
- How to Choose Between Regulated and Unregulated Bridging Finance?
- Risks and Repayment Requirements
- Frequently Asked Questions (FAQs)
Regulated Bridging Loans
Bridging loans that are regulated by the Financial Conduct Authority (FCA) are considered regulated bridging loans.
These types of loans are secured against a property that is or will be occupied by the borrower as their main residence. The borrower must live in at least 40% of the property.
Regulated bridging loans provide more consumer protection than unregulated loans.
Lenders must follow FCA rules and regulations designed to prevent misleading advertising, inappropriate advice, and predatory lending practices. This provides borrowers with more security when taking out a regulated loan.
Some key features of regulated bridging loans:
- Maximum term of 12 months
- Can be first or second-charge loans
- Interest can be rolled up to be repaid at the end of the term
- Must have a clear exit strategy, usually the sale of the property or refinancing with a mortgage
Regulated bridging loans are best suited for homeowners looking to use the equity in their main residence to purchase or improve a property they intend to live in. The FCA oversight provides an added layer of consumer protection.CopyRetry
Types of Regulated Bridging Loans
There are two types of regulated bridging loans:
- First charge bridging loans: These loans are secured against the borrower’s home. The borrower must own at least 40% of the property outright.
- Second charge bridging loans: These loans are secured against a second charge on the borrower’s home. The borrower must own at least 40% of the property outright, and they must also have a first charge bridging loan in place.
Features of Regulated Bridging Loans
Regulated bridging loans typically have the following features:
- Maximum term of 12 months: This is the maximum amount of time that a borrower can take to repay a regulated bridging loan.
- Rolled-up interest: This means that the interest on the loan is added to the principal balance each month. The borrower does not have to make monthly interest payments.
- Exit routes: The only permissible exit routes for a regulated bridging loan are sale or refinance.
Pros and Cons of Regulated Bridging Loans
- More consumer protection from FCA regulation
- Can be used for renovations, property auctions, or breaking a property chain
- Standardized lending practices help ensure that borrowers are treated fairly.
- Access to complaint processes: If a borrower has a problem with a regulated bridging loan, they can complain to the FCA. The FCA can investigate the complaint and take action against the lender if necessary.
- Slower application and approval process due to regulation
- Borrowing is limited to main residences only
- Lower maximum loan amounts than unregulated loans
What is an Unregulated Bridging Loan?
Unregulated bridging loans are not overseen by the Financial Conduct Authority (FCA).
These types of loans are typically used for investment properties, second homes, buy-to-let properties, or other commercial property transactions.
Since they are unregulated, the application and approval process is often faster than regulated loans. Loan amounts may also be higher. However, they do not come with the same consumer protections as regulated loans.
Key features of unregulated bridging loans:
- No maximum term limit
- Can be first, second, or third-charge loans
- Used for investment properties and commercial real estate
Types of Unregulated Bridging Loans
The following types of bridging loans are typically unregulated:
- Commercial bridging loans: These loans are used to finance commercial property transactions.
- Second charge bridging loans: These loans are secured against a borrower’s existing property.
- Loans for limited companies: These loans are used by limited companies to finance business activities.
- Loans to buy land with planning permission: These loans are used to finance the purchase of land that already has planning permission for development.
Pros and Cons of Unregulated Bridging Loans
- Quicker access to funds:
- More flexible lending criteria
- Higher loan amounts
- No FCA consumer protections
- Higher interest rates and fees
- More risk if unable to repay on time
- Unregulated bridging loans typically have shorter terms than regulated loans
What are the Risks of Unregulated Bridging Finance?
Generally speaking the FCA regulates industries where consumers are deemed to be more vulnerable, which is not the case with commercial finance. Over half of the bridging finance industry is currently unregulated, so it’s a normal situation rather than a rarity.
Regulated lenders are of course, a safer bet since they’re responsible to the standards laid out by the FCA, which include displaying accurate information about fees and repayment terms. The biggest risk with unregulated lenders is that the information they provide may not be 100% clear, nor may they always demonstrate 100% ethical behaviour, such as ensuring their customers are fully aware of the risks they are taking.
While unregulated finance remains a necessity for large swathes of the market, due diligence is always essential, especially in gaining total clarity over charges and terms and conditions.
How to Choose Between Regulated and Unregulated Bridging Finance?
When deciding between a regulated and unregulated bridging loan, there are a few key factors to consider:
- Intended use of funds – Regulated loans are for main residences only. Unregulated loans can be used for investment properties and commercial real estate.
- Speed of process – Unregulated loans typically have a faster application and approval process. Regulated loans require more compliance steps.
- Maximum loan amount – Unregulated lenders may provide higher maximum loan amounts. Regulated loans have lower thresholds.
- Consumer protection – Regulated loans provide more oversight from the FCA. Unregulated loans do not.
- Interest rates and fees – Unregulated loans tend to have higher rates and fees. Regulated loans may have lower costs.
- Exit strategy – All bridging loans require a clear repayment plan. Understand how you will repay the loan before signing.
- Experience level – First-time borrowers may benefit more from the protections of a regulated loan. Experienced investors often prefer unregulated flexibility.
Consider your specific situation and needs. Speak with a financial advisor if you are unsure which type of bridging loan is the best fit. Make sure you understand the full terms and conditions with any lender before taking out a loan.
Risks and Repayment Requirements
While bridging loans can be useful financing tools, they do come with some risks that borrowers should consider:
- Short repayment terms – Bridging loans typically have to be repaid within 12 months, sometimes less. Have a plan to repay on time.
- Strict collateral requirements – The loan will be secured against a property you own. If you default, you could lose the property.
- Higher interest rates – Bridging loan rates are generally higher than traditional financing. Be sure you can afford the payments.
- Early repayment charges – Repaying the loan before the term is up may incur extra fees. Check the lender’s policy.
- Fluctuating property values – If the value decreases, you may not be able to refinance for the amount you need later.
To get approved, you’ll likely need to provide:
- Collateral – Usually in the form of property, either commercial or residential real estate.
- Exit strategy – A clear plan for how you will repay the loan when due. This is mandatory.
- Income and credit status – Most lenders will review your income, credit history, and current debt levels.
Have a contingency plan ready in case your repayment method falls through. B
Bridging loans serves a specific purpose but come with risks if not managed properly.
Frequently Asked Questions (FAQs)
What’s the difference between regulated and unregulated bridging loans?
Regulated bridging loans are overseen by the Financial Conduct Authority (FCA) and can only be used for a property that is or will be the borrower’s main residence. The FCA does not oversee unregulated loans and can be used for investment properties and commercial real estate.
What are the interest rates like for regulated vs unregulated bridging?
Unregulated loans tend to have higher interest rates and fees compared to regulated loans. Always compare interest rates between multiple lenders.
How long does it take to get approved for regulated vs unregulated bridging?
Unregulated loans can often be approved in a few days since they involve less compliance and oversight. Regulated loans require more due diligence which may extend the approval timeline to 1-2 weeks.