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Regulated Bridging Loans - What You Need to Know
If you're looking to finance a residential property purchase, regulated bridging loans are a popular short-term and flexible funding solution.
Traditional mortgages, in comparison, can often be inflexible and slow to start.
But not everyone understands how useful regulated bridge loans can be – especially when it comes to buying a new home; you may be downsizing or purchasing a property at auction – whatever your reasons, a regulated bridge loan can facilitate many unique scenarios.
You may have encountered multiple and oftentimes confusing terminologies when it comes to bridging loans – what exactly is a regulated or unregulated bridging loan? Are they the same as any other bridging loan? And what’s the difference between them?
In this guide, we answer some of the common questions about regulated bridging finance. We give detailed examples of how our clients have used them, and we show you just how useful bridging loans can be when it comes to financing residential property.
And while you're here, check out our award-winning, regulated bridging service (we won regulated bridging broker 2022).
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What is a regulated bridging loan?
What is the difference between regulated and unregulated bridging loans?
How do bridging loans differ from mortgages?
What are regulated bridging loans used for?
How to get a regulated bridge loan?
What is a regulated bridging loan?
A regulated bridging loan is a short-term loan used to “bridge the gap” between buying and selling residential property.
For example, regulated bridging loans are often used to buy a house before you've sold your current one, or to buy a property to develop and later refinance with a standard mortgage.
These loans are known as “regulated” simply because they are subject to the regulatory standards of the Financial Conduct Authority (FCA) – rules by which the borrower is protected.
What makes them regulated?
In the case of regulated bridge finance, the property must be either the borrower's or a family member's own home or a property that will be theirs in the future – and used for the purposes of living in.
Regulated bridging loans are only provided by lenders who are subject to, and authorised by, the FCA - a lender must adhere to certain guidelines, ensuring that a borrower can repay the bridge loan, as well as providing clear and transparent information about the loan terms and costs.
When it comes to important financial decisions, it's often advised to consult with a bridge loan expert. Even with regulated bridging loans, it can prove an extremely valuable service in finding the right bridging loan and the best deal when sifting through the myriad of different lenders.
What is the difference between regulated and unregulated bridging loans?
Put simply, a regulated bridging loan is subject to certain financial regulations from the FCA, as stated above, while an unregulated loan is not.
What makes a bridging loan regulated is if it's used for your or a family member's future residence. On the other hand, if you're buying a property to flip or rent out, you could use an unregulated bridging loan as you won't be living there.
However, this does not mean that unregulated loans are necessarily riskier or that rules do not apply, it simply means they have a different set of criteria – often set by the lender – and are more applicable to different scenarios.
The video below is a case study of how our client used a regulated bridging loan to buy a house before selling their current home:
Read blog: Bridging Loan to Buy a House - Example of How It Works
Here is a further breakdown of the main differences:
- Regulated bridging loans – bridge loans best suited to financing the purchase of a new home or renovating or refurbishing an existing one. The most common use is bridging the gap for homeowners looking to purchase a new property before they have sold their existing one.
- Unregulated bridging loans – loans often used for commercial purposes; an experienced investor, or landlord, might use an unregulated loan when buying investment properties, multiple BTL (Buy-to-let) properties, land, or commercial buildings.
Unregulated bridging loans often have fewer restrictions on their terms and conditions, yet this sometimes means they have higher interest rates and additional fees.
The terms bridging costs can vary from lender to lender - more so with unregulated loans - and there is often more flexibility when it comes to usage.
However, it is important to note that a borrower's creditworthiness and the specific circumstances of the loan can alter costs or whether an application is successful.
This is why seeking expert advice before diving headfirst into bridging loans as an alternative financial solution is a good idea.
How do bridging loans differ from mortgages?
While both are a means of financing property purchases, bridge loans differ from traditional mortgages in a few key ways:
Bridging loans are best used to bridge a temporary gap in financing, while mortgages in comparison are long term loans designed to be paid over the set term for a property purchase. They do not have the same flexibility or share the same speed at which they can be arranged.
Interest rates
With regulated bridge loans spanning a shorter term, naturally they come with a higher interest rate when compared to traditional mortgages – this has to do mainly with risk to the lender, and rates can differ depending on a lender’s own criteria and terms.
Mortgages, on the other hand, have lower interest rates because they are long-term loans, and the risk to the lender is spread out over a longer period of time.
However, an upside to bridge loan interest is an offering to “roll up” interest to be paid as a lump sum when you come to repay the loan. You also typically only pay interest for the months that you have your bridging loan for - meaning if you can repay it early, you save on interest.
Use our Bridging Loan Calculator to get a free quote while you're here:
Repayment terms
As the term of a bridge loan comes to an end, the loan is typically repaid in a lump sum, while mortgages are repaid over time through regular mortgage payments. Additionally, with a regulated bridge loan, there are usually no early repayment fees.
Speed
With the aid of a bridging loan broker, bridge loans can be organised within a week, depending on complexity. While traditional mortgages can take a much longer period of time to be approved due to restrictions, underwriting and more stringent requirements.
Bridging loans also have different deposit requirements.
What are regulated bridging loans used for?
Regulated bridging loans typically have narrower purposes than unregulated bridging loans. They are better suited to those without prior experience as they are mostly used for financing residential property purchases or light/heavy refurbishments.
However, there are occasions in which a regulated loan – depending on the circumstances – can be used similarly to an unregulated loan for property development or new builds if it falls outside of business purposes.
For our full guide with many more examples, see: Bridging Loans.
How to get a regulated bridging loan
It can be a difficult process to approach the many lenders that offer regulated bridging loans – many of which are private lenders. To avoid the common pitfalls and save time, a popular approach is to speak to a bridge loan adviser instead.
Using a broker’s services will help guide you in an otherwise complicated process; brokers help from application to comparing rates, and finalizing finance catered towards your specific circumstances.
Here at Clifton Private Finance, we can help you better understand your options, whether you're new to regulated bridging loans or are already experienced.
Call us today on 0117 959 5094 to see how we can help, or book a free initial consultation with us below.
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