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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).
Written by: Sam O'Neill & Sam Hodgson
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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.
Sam O'Neill
Head of Bridging
Let us do all the hard work of finding the right bridging lender for your circumstances.
We secure bridging finance for applications of all types, and we negotiate competitive lending to meet your needs and timescale.
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:
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.
FAQs
Yes, a valuation is typically required for a bridging loan in the UK. Since bridging loans are often secured against a property or other valuable assets, lenders will want to assess the market value of the property being used as security. This helps the lender determine how much deposit they want you to provide based on the value and condition of the property. You can borrow up to £25m with bridging finance, but it’s typically capped at about 80% of the value of the property you’re using as security. It's important to note that different lenders have varying policies and criteria regarding the maximum loan amounts they offer for bridging finance. Some lenders have a maximum limit of over £1 million, while others may specialize in smaller loan amounts. Additionally, the terms and conditions of the loan, including interest rates and fees, should also be taken into consideration when determining the overall affordability of the bridging loan. Yes, you typically need a 20-40% deposit for a bridging loan. It can be possible to get a bridging loan without a deposit (a 100% bridging loan), but you’ll need other assets in the background to secure the loan against, and more stringent criteria and higher costs could apply. Yes, it is possible to get a 100% bridging loan (also known as a 100% LTV bridging loan), but it is rare. This means that you won’t need to put down a deposit and can borrow the full value of your property. However, the criteria for these loans can be hard to meet, and you’ll need to provide additional assets as security for your loan. Interest rates and fees can also be higher to compensate. While using bridging finance doesn’t technically make you a cash-buyer, it can allow you to act like one. Mortgages take months to process, often leading to an ‘onward chain’ where all parties involved need to wait for funds to be transferred. Bridging finance can usually be accessed a lot quicker than mortgages so you can bypass the onward chain, giving you an advantage over other buyers and being attractive to sellers. Bridging loans typically have a term of 12 months, but some lenders are willing to stretch their terms to 18 months, or even 2 –3 years depending on the case. Terms longer than 2 years will usually only be considered for specific cases. Yes, you can use a bridging loan to pay Stamp Duty. This amount could be covered by a bridging loan, providing you have a way to repay the additional borrowing amount to your lender. Yes, bridging loans are safe when they’re used in the right circumstances with a solid repayment strategy. However, we recommend speaking to a qualified advisor, like our brokers at Clifton Private Finance, before you take out a product. The main factors to consider with bridging finance are that the full loan amount will usually need to be repaid within a year, and like a mortgage, it is secured against a property as collateral. This means that in the case that you aren’t able to repay your bridging loan, your property would be at risk of repossession. But with a watertight exit strategy, bridging finance can be an efficient way to secure property quickly. Bridging loans are designed to be short-term so there’s no maximum age limit when applying for a bridging loan. This does depend on the lender, as some bridging lenders do have an upper age limit, but there are lenders on the market who offer bridging loans for borrowers aged 70 and over. Bridging loan interest rates usually range between 0.45% - 2% per month, depending on the case and the market rate. Unlike mortgage interest rates, bridging loan interest is calculated monthly instead of yearly. This is because bridging loans are short-term and, in many cases, repaid within a year. Bridging loans can be arranged without early repayment penalties, so interest is calculated monthly to ensure you only pay interest on the months you have the loan for. Unfortunately, mainstream banks in the UK don’t offer bridging loans. This means that if you’re looking for a bridging loan, you won’t be able to get one using a lender you’d find on the high street. There are a variety of specialist lenders that offer bridging loans, but because these lenders are smaller and more niche, you may need a bridging broker to access them. Banks typically charge two main fees when taking out a bridging loan – arrangement fees and interest. But there are other costs to consider such as valuation fees, broker fees and administration fees. Costs can vary from lender to lender, and will also depend on what your bridging loan is for (e.g., residential or commercial purposes.) Arrangement fees are what the lender charges you to take out the loan and can range between 1.5 - 3% of your overall loan. Bridging loan interest, on the other hand, is calculated monthly. This can catch borrowers out who may be expecting an Annual Percentage Rate (APR) like with a mortgage. Yes, you can convert a bridging loan to a mortgage through refinancing, and it is common among borrowers who use bridging finance to buy residential properties. However, whether or not you’ll be able to refinance to a mortgage is dependent on your financial circumstances, the lender, and the property you’re planning to buy. It’s important to be sure that refinancing is a viable repayment option before you take out a bridging loan on a residential property. Yes, bridging loans are typically more expensive than mortgages. Bridging loan interest rates can be much higher than a mortgage, and are calculated and displayed as monthly rates instead of the usual annual percentage rate (APR) that you’ll see on a mortgage. However, bridging loans are a short-term solution, and you’ll only pay interest on the months you’ve borrowed money for – and you can repay early without any charges (for most loans). There are many circumstances where bridging loans are an affordable option and a means to an end - for borrowers that need to finance a property purchase quickly, it may be the only option available. The two most common ways to pay a bridging loan are to sell a property or refinance to a mortgage. You may also need to ‘service’ the loan through the term, which means paying the interest monthly. However, you can opt to ‘roll up’ your bridging interest to be repaid at the end along with the capital. There are also other ways to repay a bridging loan, such as selling a business or even using money from an inheritance. The method in which you pay your bridging loan can be flexible, just as long as it is clear in your application that you have a surefire way to repay your loan when the terms are up. In most cases, a bridging loan will require a minimum deposit of 25%. However, the minimum can vary depending on the lender and the specific circumstances of the loan itself. Generally, bridging loans are secured against a property or other valuable assets, and the deposit required is often expressed as a percentage of the property's value, known as the loan-to-value ratio. In some cases, 0% deposit bridging loans are an option, but only if you have other property or assets in the background to provide additional security. No, typically, you’ll repay a bridging loan in one chunk at the end of the loan term. Bridging loans are a form of short-term finance and will usually need to be repaid within 12 months, but there can be room for flexibility. In some cases, borrowers may be required to make monthly interest payments. This means that each month, you would pay the interest accrued on the loan amount while the principal amount remains outstanding until the end of the loan term. But usually, the interest is "rolled up" or added to the loan balance and paid with the rest of the loan at the end of the term. This option can help protect your cashflow so you can spend it on moving costs or refurbishments, for example. Bridging loans can be arranged in as little as 7 working days. However, it depends on the complexity of the bridge loan and your specific circumstances. It may also be more expensive for you to rush an urgent application through – but not impossible. Bridging loans are a popular option for borrowers who are under time constraints, such as buying a property at auction or breaking a chain. The key factors lenders tend to consider are: Security - Bridging finance is usually secured against property or other valuable assets. Lenders will assess the value and marketability of your security. Exit Strategy - Lenders will want to understand how you plan to repay your bridging loan. In most cases, this is selling your old property, selling the new property (flipping), or refinancing with a long-term mortgage. Loan-to-Value (LTV) Ratio - Lenders consider the loan amount compared to the value of the property being used as security as a percentage. The LTV ratio can vary, but most lenders will have a maximum of 60-80% LTV. Remember, the criteria for obtaining bridging finance in the UK can vary depending on the lender and your circumstances.
Do you need a valuation for a bridging loan?
How much can you borrow with bridging finance?
Do you need a deposit for a bridging loan?
Can I get 100% bridging finance?
Does a bridging loan make you a cash buyer?
What is the longest bridging loan term?
Can I use a bridging loan to pay stamp duty?
Are bridging loans safe?
Can an 80 year old get a bridging loan?
What is the monthly interest rate on a bridging loan?
Do banks still do bridging loans?
How much do banks charge for bridging loans?
Can you turn a bridging loan into a mortgage?
Is a bridging loan more expensive than a mortgage?
How are bridging loans paid?
What is the minimum deposit for a bridging loan?
Do you pay monthly payments on a bridging loan?
How long does it take for a bridging loan to come through?
What is the criteria for bridging finance?
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