Are Bridging Loans Regulated or Unregulated?
Bridging loans can be either regulated or unregulated, depending on the nature of the loan.
Regulated activity is typically used to help homeowners move home and the regulation gives added confidence and security to people so that they do not lose their primary residence.
Unregulated activity is more commonly used by developers and investors because it allows for more flexible terms to purchase properties which they develop and sell for profit.
Of all the bridging loans that are funded each year in the UK, around 50% are regulated and 50% are unregulated.
Whether it is a regulated or unregulated bridging loan, the loan is secured against a property and both are available by means of first and second charge.
What is The Difference Between a Regulated and Unregulated Bridging Loan?
| Feature | Regulated Bridging Loans | Unregulated Bridging Loans |
|---|---|---|
| Loan Terms | Typically 1 to 12 months, extendable up to 24 months | Usually 1 to 18 months, extendable based on lender discretion |
| Interest Rates | Generally lower due to stricter regulation | Typically higher, reflecting greater risk and flexibility |
| Regulated by FCA | Yes, fully regulated by the Financial Conduct Authority (FCA) | No, not subject to FCA regulation |
| Interest Payment Options | Monthly, rolled-up, or retained | Monthly, rolled-up, or retained |
| Purpose | Must be for residential property, primary residence | Can be for residential, commercial, or investment properties |
| Loan-to-Value (LTV) | Typically up to 75% | Can go higher, sometimes up to 80-85% depending on lender |
| Borrower Protection | Offers consumer protection, cooling-off periods, clear terms | Minimal protection, terms vary widely by lender |
| Application Process | More thorough, requires full documentation and checks | Quicker, fewer checks, less documentation |
| Usage | Suitable for consumers buying a home or refinancing | Suitable for property investors, businesses, and developers |
| Exit Strategy | Clearly defined exit plan required (e.g., sale of property) | Flexible exit strategies, sometimes less clearly defined |
| Fees | Generally lower due to regulation | Potentially higher, including arrangement and exit fees |
| Borrower Type | Individuals purchasing a home or refinancing their residence | Companies, investors, and developers |
What is a Regulated Bridging Loan?
Regulated bridging loans are designed to give more protection to people who are borrowing against their primary residence and prevent them from losing their home.
So if you are taking out a bridging loan against someone’s residence where they live (at least 40% of the time), this falls under regulated activity.
The regulated side of the bridging loan industry is governed by the Financial Conduct Authority (FCA). The added measures that the FCA put into place includes:
- Protecting consumers from incorrect advice and misleading behaviour from potential lenders and brokers
- Requires lenders and brokers to be authorised, licensed and “fit” to offer regulated loans
- Requires lenders to offer clear and transparent fees and pricing
- Requires lenders to conduct affordability checks (and often credit checks) to check eligibility for loan
- Requires lenders to provide a cooling-off period so borrowers can change their mind after a certain period and incur zero fees.
The maximum loan is 12 months, although can be extended to 24 months and interest rates are usually lower due to regulation.
What is an Unregulated Bridging Loan?
An unregulated bridging loan does not fall under any national governing body such as the FCA and is better suited for developers and investors because it offers a faster approval and funding process and more flexibility with loan structures and repayments.
Unregulated bridging loans can be more tailored for the individual borrower’s more personal needs, when it comes to things like loan amount, LTV, repayment schedule and fees.
Unregulated lenders may take more of a view with applicants with different credit backgrounds and levels of experience. Part of the reason that the activity is unregulated is because the lender is potentially taking on more risk by offering more flexible rates and a willingness to approve adverse credit histories.
Who Would Use a Regulated Bridging Loan?
A regulated bridging loan might be used by a homeowner, assuming that they are a resident and living in the property for at least 40% of the time.
To purchase a property – If a homeowner wishes to buy another property but cannot sell their own, rather than miss out, they can use a bridging loan to become a cash buyer and buy the new property. Once their existing home is sold, the loan is repaid.
To buy a property at an auction – If an individual is buying a property at auction, they will pay a 10% deposit upon winning the bid and then have 28 days to come up with the remaining 90% of funds.
To renovate an existing property – Bridging loans can be used to renovate an existing property that they currently live in – this could be first or second charge.
To break a property chain – If a homeowner is looking to move house but is stuck in a long property chain, a bridging loan helps you to become a cash buyer and not need to rely on mortgages or funds from the chain below to make the deal proceed.
Who Would Use an Unregulated Bridging Loan?
An unregulated bridging loan would be more attractive to a property developer, either an individual developer or group, or an investor looking to expand their property portfolio by completing on property transactions quickly.
The flexibility of terms such as loan durations, LTVs and repayments make them better suited for those looking to grow their businesses.
Purchase and refurbishment – Buying a property that can be sold for a profit, whether it is doing light or heavy refurbishment work as well.
Keep a chain from breaking – Developers can purchase a new property before the sale of an existing property that they own.
Expanding a property portfolio – Whilst money is tied up in existing properties or investments, the nature of an unregulated bridging loan allows for small deposits and large amounts to be borrowed.
What Can a Regulated Bridging Loan Be Used For?
A regulated bridging loan can be used to purchase:
- Homes
- Flats
- Bungalows
- Chalets
- Villas
- Second homes
What Can Unregulated Bridging Loan Be Used For?
- Buy to lets
- Offices
- Hotels
- Garages
- Warehouses
- Factories
- Investment properties
- Care homes
- AirBnBs
- Student accommodation
Can You Still Trust an Unregulated Bridging Lender?
Yes, some of the most respected and successful bridging lenders in the UK only do unregulated bridging activity.
Whilst not formally regulated under the FCA, there are very well established governing bodies that oversee the work of unregulated lenders and help to maintain high standards.
These bodies include the NACFB, FIBA, BDLA and IMLA.
