Rhiannon Philps
Tim Leonard
Bridging loans can be either regulated or unregulated, depending on whether you are using the loan for your own home or for commercial reasons.
Regulated and unregulated bridging loans are similar in many ways as they are a type of short-term, secured loan, designed to ‘bridge the gap’ until you can arrange longer-term finance on a property, or have access to cash after selling a property, for example.
However, the question of whether you need a regulated bridging loan or can take out an unregulated loan depends on your situation and the type of property the loan will be secured against.
» MORE: What is a bridging loan?
Regulated bridging loans explained
Bridging loans on residential properties need to be regulated by the Financial Conduct Authority (FCA).
In other words, if you’re taking out a bridging loan for your own home, a home of a close family member, or a property that you or a close relative plan to live in, it will be regulated.
A regulated bridging loan will usually offer a maximum term of one year.
When might you need a regulated bridging loan?
Some examples of when you might take out a regulated bridging loan include when:
- paying for your new home if you can’t sell your existing home first
- renovating a property that you live in or plan to live in and can’t get a mortgage until the work is done
- buying a property at auction, if you can’t get a mortgage in time
- settling financial arrangements in the event of a divorce, such as paying a lump sum to one of the parties to buy them out of the house they jointly own.
Bridging loans are regulated in these situations as the loan is secured on your own home, and there is a risk that the lender could repossess it if you don’t pay off the debt.
What are the benefits of regulated bridging finance?
Taking out a regulated bridging loan means you are entitled to consumer protection from the FCA. The lender needs to meet certain standards and regulations, such as highlighting the costs and risks of a bridging loan in a clear and easy-to-understand way. They may also conduct more thorough checks before approving a loan application compared to unregulated loans, to ensure people don’t take out unaffordable and unsuitable loans.
With an FCA-regulated bridging loan, you will have protection if you are sold an unsuitable product or given bad advice, and you could be eligible for compensation.
Bridging loans could be useful if there is a delay in selling your home as it could prevent a break in the property chain. However, you need to bear in mind that they can be expensive and you need to be certain that you will be able to pay it off in the near future.
Unregulated bridging loans explained
Even though an unregulated bridging loan may not sound particularly safe, all it means is that these specific kinds of bridging loans don’t need FCA regulation.
The FCA is there to protect consumers, so if you’re taking out a bridging loan on a property you won’t be living in, you won’t be entitled to the same FCA regulation as you are not regarded as a consumer in this instance.
Because of this, unregulated bridging loans may have fewer restrictions and checks than regulated loans. For example, you might find you’re able to take out an unregulated bridging loan for as long as two years.
When might you use an unregulated bridging loan?
A bridging loan can be unregulated if it’s for:
- a buy-to-let property
- a commercial property
- an investment property that you will refurbish and sell on
However, if you or an immediate family member is planning to live in the property, you will need a regulated bridging loan.
Are unregulated bridge loans safe?
Just because these types of bridging loans aren’t regulated by the FCA, it doesn’t mean they’re not monitored to help make sure lenders stick to certain standards.
For example, there are a number of industry bodies, such as the Association of Short Term Lenders (ASTL), the Financial Intermediary and Broker Association (FIBA), and the National Association of Commercial Finance Brokers (NACFB) that providers of unregulated bridging loans can join.
Members of these bodies have to act according to codes of conduct, such as displaying all costs and fees up front, treating customers fairly and responding to customer complaints in a timely manner.
Differences between regulated and unregulated bridging loans
The main difference between regulated and unregulated bridging loans is the consumer protection you are entitled to and the checks you have to go through before you are approved for a regulated bridging loan.
Bridging loans for residential properties will all be regulated by the FCA, whereas other types of bridging loans won’t come under FCA regulation. Regulated loans are likely to involve more affordability checks and stricter criteria, for example, as it’s usually the consumer’s own home that is at risk if the loan isn’t repaid.
Because of this, it may be quicker to get an unregulated bridging loan than a regulated loan as there may be fewer checks and processes to go through. It might also be possible to get an unregulated bridging loan for a term of up to two years, compared with a maximum of one year for a regulated loan.
What to be aware of with both regulated and unregulated bridge finance
Whether you take out a regulated bridging loan or an unregulated bridge loan, lenders will still conduct checks on your financial situation and they would want to see your exit strategy – your plan on how to repay the bridging loan. This could be from the sale of a property, for example.
Whatever type of bridging loan suits your needs, be sure to always check the terms of the agreement and the cost of the loan. Bridging loans can be expensive, so you should always have a clear plan of how you will pay off the loan before applying.
It may be worth seeking professional advice to help you work out if a bridging loan is the right step for you, and exploring any other funding options that might be available too.
» MORE: Alternatives to bridging loans
WARNING: Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.
Image source: Getty Images
Dive even deeper
Can You Get a Bridging Loan With Bad Credit?
It might be possible to get a bridging loan with bad credit if you have a strong exit strategy for repaying the loan and can offer the lender the security it needs. Bad credit bridging loans may be available to both personal and commercial borrowers.
A Guide to Bridging Loan Rates and Costs
Bridging loan costs can quickly stack up, with various fees being payable alongside the bridging loan rate that will determine your monthly repayments. To keep the cost of a bridging loan low, try to borrow at the lowest loan-to-value ratio possible against a property in a good location.
Bridging Loans Explained: How do Bridge Loans Work?
A bridging loan can act as a bridge between the sale of one property and the purchasing of another. It is a short-term option that helps bridge a financial gap whether you’re a landlord or property developer, or simply moving house.
Brean Horne