Bridging loans provide you with short-term finance that’s quick to arrange and flexible. Secured against your property, this type of loan is designed to bridge the gap between financial transactions. That way, you don’t need to miss out on an opportunity while you’re waiting for funds. For example, you may be waiting to receive a cash sum after a property sale goes through or for longer-term finance to be arranged.
When looking at bridging finance, you’ll notice that there are two types — regulated and unregulated. So what is the difference between regulated and unregulated bridging loans and which type is best for your needs? We’ll explain each type below so that you can make the right choice.
What is a regulated bridging loan?
This type of bridging loan is regulated by the Financial Conduct Authority (FCA). It provides a higher level of consumer protection and lenders must be transparent with their information. A regulated bridging loan is secured against a property that either you or an immediate family member currently live in or intend to live in as your main residence. You or your family member must occupy at least 40% of the property.
This type of loan is usually offered for a maximum term of 12 months. It can be either a first or second charge loan. You need to provide the lender with an exit strategy, such as refinancing with a mortgage or selling the property. The interest for a regulated bridging loan can be rolled up, which means that it’s added to the loan balance each month to be repaid at the end of the term. That way, you don’t have to make any monthly payments.
Why use a regulated bridging loan?
A regulated bridging loan provides you with fast access to funds when dealing with a residential property transaction. For example, to buy a property to live in or to renovate your current or prospective home. You can use it to:
- Break a property chain. To avoid being stuck in a chain or risking a chain collapse, you can use a regulated bridging loan to buy your new home while you’re still trying to sell your current one.
- Renovate a property. This can either be your current home or a property that you intend to use as your home. You may not be able to secure a mortgage on a property that requires extensive work so this bridging loan enables you to carry out the renovations and then be approved for a mortgage.
- Buy a property at auction. The auction process is fast and a mortgage can take time to go through. A regulated bridging loan ensures that you can buy the bargain property you want without missing out on a good opportunity.
- Buy a home quickly. You may need to buy somewhere to live quickly and can’t wait for a mortgage to go through. With a regulated bridging loan, you can buy your new home and then refinance to a mortgage.
What is an unregulated bridging loan?
An unregulated bridging loan isn’t regulated by the FCA. As such, you don’t have as much consumer protection as with a regulated bridging loan. As it isn’t subject to the same restrictions as a regulated bridging loan, it’s faster to arrange and offers more flexibility. You may also be able to secure a higher loan amount. An unregulated bridging loan is usually used for investment or commercial properties or other non-residential transactions. It is secured against a property that’s not your residence, such as a commercial or buy-to-let property.
This type of loan offers a longer term than a regulated one, such as up to 24 months. It can be either a first, second or even third charge loan. The lender needs details of your exit strategy and the interest can be rolled up. As a property investor, developer or business owner, not having to make monthly payments helps with your monthly cash flow.
Why use an unregulated bridging loan?
An unregulated bridging loan provides you with faster access to funds than a regulated one and offers more versatility with its uses for commercial or investment property transactions. For example, to purchase a buy-to-let or commercial property, to start a business venture or expand your current business, to convert or renovate a property or to repay a development finance loan. The lending criteria are less strict and higher loan amounts tend to be offered. You can use it to:
- Buy a property for buy-to-let purposes
- Buy a property at auction
- Convert a property
- Buy a property to refurbish or renovate before selling it for profit
- Increase the size of your property portfolio
- Buy a commercial property
- Buy a plot of land with planning permission for development
- Repay a development finance loan
- Buy new business premises or expand your current premises
- Finance your business activities, such as buying machinery and equipment, paying a tax bill and maintaining liquidity
The pros and cons of a regulated bridging loan
Pros
There are different advantages to consider with a regulated bridging loan:
- Increased consumer protection via the FCA
- No monthly payments with rolled-up interest
- Lower interest rate than an unregulated bridging loan
- Various uses for your current home or a prospective one
Cons
There are also disadvantages to think about before applying:
- Limited use for a main residence only
- Stricter criteria and more restrictions as it’s a regulated loan
- Higher interest rate than for other forms of lending
- Lower loan amounts available than with unregulated bridging loans
- Fewer regulated lenders than unregulated ones, reducing your choice
The pros and cons of an unregulated bridging loan
Pros
There are various benefits to consider with an unregulated bridging loan:
- Wider choice of lenders
- Longer terms available
- Higher loan amounts available
- More flexibility with the loan uses
- Less strict eligibility criteria
- Faster arrangement process than for regulated bridging loans
Cons
There are also drawbacks to think about:
- Lower consumer protection
- Higher level of risk
- Higher interest rate than a regulated bridging loan
Should you choose a regulated or unregulated bridging loan?
When trying to decide which type of funding you need, the main difference between regulated and unregulated bridging loans will make your choice much easier. If the loan is to be secured against your main residence or that of a family member, it needs to be regulated. This type of loan is more structured and provides you with more protection.
If you need the loan for commercial or investment purposes, then opt for an unregulated loan. This provides you with much more flexibility than a regulated loan with the possibility of obtaining a higher loan amount as well as a faster application process.
Secure the right bridging loan for your needs
Our bridging finance experts are on hand to help you make the right decision. Just give us a call on 01322 907 000 to discuss your funding requirements and circumstances. We can quickly identify the right type of bridging loan for your needs and situation.
We work with both regulated and unregulated bridging loan lenders and will search for the best deal for you. We’ll ensure that you’re aware of the loan costs and agreement terms and that your exit strategy meets the lender’s requirements. If we feel that an alternative type of lending is more suitable for you, we’ll provide you with details of the funding options so that you can make an informed decision.