What is the difference between unregulated and regulated bridging loans?
When completing on a property transaction, finding the right loan for you can be difficult. This is not due to the lack of products available, but the opposite. There are thousands of unregulated and regulated bridging loans on the market, making it hard to narrow down an experienced lender that meets your specific needs.
When it comes to bridging finance there are two common types of loans you can use, regulated and unregulated. But how are they different and how do you know which is the best for your property investment?
- Regulated bridging loans: Used by homeowners who have found themselves falling short of funds, often due to delays. The borrower lives in the property the loans in for.
- Unregulated bridging loans: Favoured by intermediaries, property investors and property developers, often to ‘bridge’ a payment gap with a tight turnaround. The borrower does not live in the property the loan is for.
How do I know which loan I need?
Determining if you need an unregulated or regulated bridging loan will depend on the type of property you wish to purchase.
- If you are looking to raise a first or second charge against a property that is the residence of the owner, then you will need a regulated bridging loan. A minimum of 40% of the property will need to be (either now or in the near future) lived in by the homeowner.
- If you are looking to purchase or refinance a secondary property, commercial asset or a buy-to-let investment, then you can use an unregulated bridging loan. These short-term loans can be for expanding property portfolios or investing in long-term capital gains.
What is a regulated bridging loan?
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. If other people are looking to live in the property, you will most likely need a buy-to-let loan or mortgage. (You can read more on buy-to-let’s by downloading our buy-to-let guide.)
Regulated bridging loans can be either first or second charge and share the same regulations as residential mortgages. Typically, they offer:
- A maximum term of 12 months
- Rolled up interest options
- An exit strategy based on either the sale of a property or refinancing.
While there are benefits to regulation, it is also important to understand its constraints, such as:
- Multiple levels of bureaucracy
- Long processes and checks
- Delays that mean lenders cannot provide funding for tight deadlines
Who regulates loans?
The Financial Conduct Authority (FCA) regulates the financial services sector including lenders that offer bridging loans. The purpose of the FCA is to protect consumers from incorrect advice and misleading behaviour from lenders and brokers as well as promoting fair competition.
What can I use a regulated bridging loan for?
You can use regulated bridging loans for several purposes:
- Renovate a property you currently live in or are looking to move into
- Purchase a property at auction
- To break a property chain
Remember that when it comes to repayment, using your home residency as security will put your home at risk and it may be repossessed if you are unable to keep up with payments on your loan.
What is an unregulated bridging loan?
An unregulated bridging loan is a popular source of short-term finance for people looking to complete their property transaction quickly. Their flexibility allows them to be tailor made for borrower’s individual needs and can mitigate a lot of the constraints regulated bridging loans are subject to. Most commonly, unregulated bridging loans cover:
- Investment opportunities to expand a property portfolio
- Buying a new property before the sale of another property
- Financing refurbishment or conversion works so the property can be sold for a profit
The FCA does not offer protection for bridging loans used to secure an investment property, buy-to-let investment, or commercial real estate. This means all bridging loans including commercial or residential ones are unregulated.
What can I use unregulated bridging loans for?
Unregulated bridging loans can be used for many of the same reasons as a regulated loan. The only difference is that when a property is bought with an unregulated bridging loan, it can’t be purchased with the buyer intending to live at the property. It can be used for if you are looking to:
- Expand your property portfolio
- Invest in a buy-to-let property
- Buy a property from an auction house
- Start a new business venture
- Raise funds against a property to purchase another asset for business purposes
How do I know I can trust an unregulated lender?
Much like how a regulated lender will follow the Financial Conduct Authority procedures, established unregulated bridging lenders will also adhere to proper and professional behaviour. Here are some of the esteemed bodies recognised in the bridging industry for unregulated lenders, that help create and maintain the correct standards for its lender members:
Look our on your preferred lender’s website if they are members of these associations.
Can I still get a second charge with an unregulated lender?
Yes, an unregulated lender is able to lend second charges. Some lenders may also provide third charges. Due to the nature of a second charge, they can often be subject to higher interest rate rates, as the lender takes on more risk.
Overall, borrowers and brokers need to engage with established lenders who have a strong track record when it comes to deploying bridging loans. If you are a borrower, it can be beneficial to speak with a financial adviser to find out whether unregulated or regulated bridging loans are right for you.
It is also important that lenders educate their brokers, intermediaries, and borrowers in the different types of bridging loans available and how they can work for them.
If you wish to, you can also speak to a lender directly. If you have questions regarding unregulated bridging loans, then contact our team today.