Unsure whether you need a regulated or unregulated bridging loan?
Currently only part of the bridging loan industry is regulated, and it’s important you understand the details before securing your loan.
There are, in fact, two different types of loan available in the UK market. Here we’ll explain the basic differences between these, as well as the important points to look out for.
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Are Bridging Loans Regulated?
The first thing to understand is that regulation isn't something you can choose, it simply refers to current legislation about different aspect of the finance market. So in the case of bridging, the residential market is currently regulated, and the commercial side currently not.
What is the Difference Between Regulated and Unregulated Loans?
The Financial Conduct Authority FCA is the conduct regulator for some 59,000 financial services firms in the UK, and has the stated goal of:
- protecting consumers
- ensuring fair competition
- ensuring the integrity of the UK financial system
Essentially, FCA regulated loans carry more protection than unregulated ones, giving consumers an extra level of safety beyond common law or the existing consumer protection laws.
They are also subject to supervision and enforcement where appropriate meaning consumers are protected under the Mortgage Code of Business (MCOB) rules.
This isn't something you can choose, however, when selecting your loan. If you're applying for a residential bridging loan it will be automatically regulated. If you're applying for commercial bridging finance it will be automatically unregulated.
What is a Regulated Bridging Loan?
Regulated bridging loans are therefore those which fall under the protection of the FCA, i.e. residential ones.
These aim to offer consumers a heightened level of protection against unscrupulous behaviour on behalf of either the lenders or finance brokers.
Regulated Loans can be either:
In the bridging loan market only consumer loans secured by a first charge on the borrowers (or partners's) home are regulated. This arrangement is sometimes known as a regulated mortgage contract.
Certain loans which are secured by a second charge on a borrower (or partners's) home are also regulated. These are known as consumer credit loans.
In both cases at least 40% of the property must be currently or going to be lived in by the property owner.
Regulated loans are generally restricted to a maximum of 70% loan to value(LTV), although higher amounts are available in certain cases.
Common Aspects of Regulated Bridging Finance
- 12 month maximum terms
- Rolled up Interest Options Only (rather than monthly)
- Exit Route Limitations - Sale or Refinance are the only permissible routes, with some lenders allowing only sale.
Which Bridging Loans are Unregulated?
Currently, all commercial bridging finance is unregulated, meaning the FCA extends no protection or supervision to this area of the industry. If you're securing a loan for an investment property, a commercial building, or for a buy-to-let it will not be regulated.
Most Second Charge
Most second charge loans are also unregulated with certain exceptions.
Loans for Limited Companies
Any loan taken out by a limited company as opposed to an individual will be unregulated.
What the Risk 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. Currently, over half of the bridging finance industry is unregulated, so it's the 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 around 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.
Can I Get Regulated Development Finance?
Where the borrower wishes to develop a property that is going to be their only dwelling, it is possible to use regulated bridging finance.
At least 40% of the property must be used for dwelling in order to qualify.
This type of finance is commonly used for new build projects on plots of land or where planning permission has been granted for the garden of an existing property.