Regulated Bridging Loans explained
Finding suitable property finance can be complicated. As many products are available to borrowers, it’s not always easy to decide which is ideal for your circumstances.
Before committing to a loan, there is much to consider. Decisions made without expert advice can lead to future headaches with many available options.
Today we’ll explain bridging finance and specifically regulated bridging finance. When it comes to bridging finance, there are two types of loans you can utilise: regulated and unregulated bridging loans.
We’ll explain both and when regulated bridging loans are suitable to apply to your specific circumstance.
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The Difference Between a Regulated and Unregulated Bridging Loan
Regulated bridging loans are loans required by homeowners when obstacles created through circumstances like delays have left them without immediate funds. An unregulated bridge loan is often used by a property developer or investor to secure payments when other factors create delays in cash flows, often related to commercial property.
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What is a Regulated Bridging Loan?
Bridging loans are loans developed to bridge the gap between alternative available credit and already-existing debt. They’re short-term loans with interest repayments that assist borrowers with finance to fund projects where delays would be damaging.
Regulated bridging loans are loans secured against properties occupied by borrowers or their immediate family members. They can be first or second-charge loans, with identical regulations to residential mortgages applying to them.
Typically a regulated bridge loan would last for a year at most, with higher than usual interest rates. Refinancing or property sales are generally exit strategies associated with this type of loan.
There are benefits associated with regulated bridge loans. Still, there are also potential pitfalls. The processes and checks for securing them can be arduous, meaning there are often delays in assessing applications. As such, if you’re working to a time frame, a regulated bridging loan may not be the way to go.
Although there are potential hazards, these bridging loans are still faster to implement than secured loans and mortgages. They are options if you’re willing to put up with the many bureaucratic layers often associated with them.
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What Bridging Loans Can Be Used for
You can use bridging loans for numerous reasons, some well-known and others that you may be surprised to read.
- The most commonly-used reason for applying for a bridging loan is to purchase a property without having to wait for your own sale. This means you can avoid “breaking the property chain.”
- You can take a loan to renovate or upgrade your property or one you’re looking to move to.
- When you successfully bid on a property at an auction, you usually have 28 days to complete the transaction. Bridging loans are often applied for, as mortgage applications typically take much longer to conclude.
- Upgrading or renovating your property may require extra funds. Bridging finance is a viable alternative to extra mortgaging, with some lenders unwilling to entertain this.
- Securing a short-term bridging loan can be the difference between selling your home and having it repossessed. If you’re selling your property, it is unlikely that income levels and bad credit are likely to hinder the application process.
- Bridging loans get used to cover lease extensions before property sales. This increases your chance of maximising a selling price.
- If you’ve ended a marriage or civil partnership, you can use a bridging loan to buy your ex-partner’s share of your joint property.
- Care homes will often need several months’ payment upfront, meaning your alternatives are to move into a lower-quality home or find a way to cover the upfront payment. A bridging loan is a decent way of doing this.
If you’ve put your property up as security for a regulated bridging loan, missing repayments could place your home at risk of repossession. Make sure you’re in an excellent position to take out a bridging loan before doing so.
Who Regulates Loans?
Bridging finance is regulated by the FCA or Financial Conduct Authority.
The FCA is the UK’s regulator for financial services, including the providers offering bridging loans. The FCA is in place to safeguard borrowers from any questionable behaviour or advice from financial brokers or lenders. It also facilitates proper competition practices.
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Regulated Bridging Loan Eligibility Criteria
Your eligibility for a regulated bridging loan depends on several factors. The financial lender itself generally defines this, with some of the criteria it’ll likely look into being:-
Who you are
Borrowers looking to take out a regulated bridging loan should do so in their own name. Bridging lenders will rarely consider these types of loans in the names of limited companies, pension funds, trusts or other structures of applicants.
Loan period
A lot depends on the period for which you’re looking for the loan. Regulated bridging finance shouldn’t have a minimum loan term, but the maximum period for a loan will often be one year only.
Borrowing amount
The amount you can borrow will depend on whether you’ll be able to exit the loan without any problems. There are other related factors, but this would often be the deal-maker or breaker.
Most lenders will fund individuals with all kinds of credit difficulties, whether current or in the form of defaults, CCJs, mortgage repayment arrears, or under potential repossession or bankruptcy clouds.
Individual financial lenders will set their limits for regulated loans, but generally, they start at about £25,000. The borrowing ceiling is often not defined but depends on individual applications.
Loan to value percentage
Lenders will offer up to 75% LTV for top loan applications, with a property being lived in by the borrower offered as security.
Affordability checks
Affordability checks might not be carried out depending on the exit strategy in place. If the interest is serviced monthly, or the exit strategy is refinancing a fixed-term mortgage, you can expect an affordability check to be done.
Exit strategy
Your exit strategy is the way you expect to repay your bridging loan. This could be the deciding factor in whether your loan application is accepted. As long as your exit strategy is legitimate and practical, it would be best if you didn’t have difficulty securing the required loan.
Most exit strategies are to refinance the bridging loan as a mortgage or the sale of the secured property or another.
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Connected Rates and Fees for Regulated Bridging Loans
Before entering into any bridging loan agreements, knowing the related fees and rates is a good idea.
Interest rates
More substantial applications’ interest rates are likely between 0.50% and 0.65% monthly. These rates are layered according to the required LTV. Lower interest is assigned to lower loan-to-value percentages.
Products can be offered at either variable or fixed interest rates, and the choice is often left to the borrower.
As bridging finance takes place on a short-term basis, the chance of changes in interest rates is substantially reduced.
Any interest is generally added to the loan amounts and paid along with the bridging loan payment itself.
You can pay your interest monthly, too, depending on the lender. Lenders will require proof of affordability if they agree to monthly interest payments. You can ask about the cost of a bridging loan when enquiring with a bridging broker assigned to you.
Fees
Whenever new bridging loans are taken out, applications are likely to be subject to a range of different fees, including the following:-
Valuation fee
Valuation or service fees are paid to the lender’s chartered surveyor. Costs of these fees differ between lenders; if an electronic evaluation is carried out, they may not apply.
Lender arrangement fee
When the lender releases the loaned funds, they will likely charge an arrangement fee of approximately 2%. For bigger loans, this fee will be a lesser percentage in most instances, and these fees are normally incorporated into the loan amount.
Broker fee
Brokers will often charge service fees which are either in the form of a percentage of a lump sum.
Exit fee
Many lenders charge exit fees on their loans, which can be a month’s interest or 1.5% of the total loan amount, depending on the individual lender.
Legal fees
When you take out a bridging loan, you must pay the lender’s legal fees and your own.
Early repayment charges
You might have to pay early repayment charges if you decide to repay the loaned amount in full earlier than stipulated. Before signing any loan contract, you should check this with your lender or broker.
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What Documents Lenders Will Ask for
A lender will likely request the following documentation from you:-
- Savings account and bank statements
- Proof of residency and identity
- Exit strategy proof
- Payslips or other proof of income or full accounts for self-employed people
- Mortgage details if you’re applying for a second charge mortgage
How Long Does an Application Take?
Applications for bridging loans get assessed promptly. In exceptional circumstances, they could be approved on the same day, but you should generally expect your application approval within five days to two weeks.
FAQs
How can I find a bridging finance better deal?
You can contact different lenders and establish what deal they can give you or speak to an expert who will provide you with various options. They will also give you expert advice through the application process.
Do second-charge bridging loans get regulated?
Yes, second-charge loans do get regulated, except in abnormal circumstances. It could be unregulated if your loan is for business purposes and exceeds £25,000.
Can I take an unregulated loan instead of a regulated one?
No, you aren’t able to. When loans are within regulation parameters, you have no option but to take out a regulated loan. If you have any questions about the regulations, chat with a professional, like one of our Loan Corp experts.
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