A bridging loan/bridging finance, is a type of short-term loan or finance agreement which enables you to utilise your property’s equity; for example, to help you buy another property, or to make refurbishments etc. The bridging loan is secured against the value of your existing property.
Bridging loans are popular amongst homeowners, property developers, and property investors for the flexibility they offer. Though popular, bridging loans also carry risks. As the bridging loan is secured against your property, you risk your property being repossessed if you are unable to make your loan repayments as agreed. Also, given that they are short-term loans, the bridging loan interest rates are relatively high.
Regulated Bridging Loans
Regulated bridging loans are regulated by the Financial Conduct Authority (FCA). Regulated lenders are subject to the supervision of the FCA and the standards set out by the FCA, including the display of accurate information around fees and repayment terms. The FCA gives consumers an extra level of safety by operating to protect them from incorrect advice or misleading behaviour from lenders or brokers. With an FCA-regulated bridging loan, you could be eligible for compensation if you are sold an unsuitable product or given bad advice. By contrast unregulated bridging loans are not regulated by the FCA and so do not offer this same protection.
A bridging loan becomes ‘regulated’ when it meets the following criteria at the time the contract is entered into:
The lender must be providing credit to an individual or to trustees acting as borrower. A contract entered into with a company as borrower (unless acting as a trustee), is not regulated.
The borrower’s obligation to repay the lender must be secured by a mortgage on land/property. A contract taking security over moveable property such as a caravan therefore, cannot be a regulated bridging loan unless the contract also involves a mortgage over the land on which the caravan stands.
At least 40% of the land/property on which the loan is secured must currently be occupied, or intended to be occupied:
- as the borrower’s home; or
- the home of any immediate members of the borrower’s family
Typically, regulated bridging loans:
- have a maximum term of 12 months
- will only allow rolled up interest options (rather than the option to pay monthly interest payments) and
- often stipulate that the exit route (by which you plan to repay the loan) is limited to either the sale of a property or refinancing.
Unregulated Bridging Loans
An unregulated bridging loan occurs when the property being used as security, is for business or investment purposes which will never be occupied by the borrower or any member of their immediate family.
As alluded to above, a bridging loan also becomes unregulated when it is taken out under the name of a company instead. As such the main difference between a regulated and an unregulated bridging loan is that for regulated bridging loans the transaction is not intended for business purposes.
As noted above, the FCA do not regulate unregulated bridging loans as the secured property or intended purchase is for business purposes. Businesses are normally assumed to have a better understanding of the contracts they are signing and the agreements they are making, and so do not require the same protection that is afforded to consumers.
If you are looking for assistance with the sale or acquisition of property/land or for its development, whether through use of a bridging loan or not, contact a member of our commercial property team today on 0845 287 0939 or get in touch by email.