The difference between regulated and unregulated bridging loans
By Paresh Raja -
When completing on a property transaction, finding the right loan can prove immensely challenging.
This is not due to the lack of products available; rather, the difficultly is sorting through the thousands of products and finding an experienced lender who can offer a loan relevant to one’s specific needs.
Twenty years ago, few property buyers would have considered bridging loans. At the time, this was due to specialist finance lenders accounting for a tiny proportion of the wider lending market.
In the immediate aftermath of the global financial crisis, however, bridging loans became a popular option for investors in need of tailored finance that could be deployed quickly, regardless of how complicated their financial circumstances are.
The bridging sector is now worth over £4 billion.
What’s more, the impact of COVID-19 on the lending market has demonstrated once again the importance of specialist finance in meeting the needs of buyers in times of crises.
Market awareness of specialist finance is growing. As such, it is important for brokers, intermediaries and borrowers to understand the different types of bridging loans available and how these are regulated.
Regulation in bridging
The Financial Conduct Authority (FCA) regulates the financial services sector to protect consumers and promote fair competition.
When discussing regulation in the bridging industry, people wrongly assume lenders are either regulated or unregulated. This is not the case.
In reality, the FCA regulates certain types of bridging loans.
So, what types of bridging loans are regulated?
Regulated bridging loans
In the UK, a bridging loan is regulated when it is secured against a property that is currently occupied, or will soon be occupied, by either the borrower or an immediate member of their family.
These bridging loans can be either first or second charge and must abide to the same regulations that are applied to residential mortgages.
Typically, regulated bridging loans have a maximum term of 12 months, rolled up interest options and an exit strategy based on either the sale of a property or refinancing.
Unregulated bridging loans
All bridging loans that are being undertaken to support a commercial acquisition of a property are not regulated.
This means the FCA does not offer protection for bridging loans used to secure an investment property, a buy-to-let investment or commercial real estate.
At the moment, over half of the bridging loans deployed in the UK are unregulated.
They remain a popular source of finance for those in need of financing to quickly complete on a property transaction and are tailored to the individual needs of the borrower.
Established bridging lenders look to respected industry bodies such as the NACFB, FIBA and ASTL to ensure unregulated bridging adheres to the highest professional standards.
Will regulation of bridging loans increase?
While there are benefits to regulation, it is also important to understand its constraints; such as multiple levels of bureaucracy, time-consuming processes and checks, and ultimately, the inability for lenders to act quickly.
This is why commercial bridging finance is not regulated.
Overall, borrowers and brokers need to engage with established lenders who have a strong track record when it comes to deploying bridging loans.
What’s more, it is always advisable to speak with a financial adviser to find out whether regulated or unregulated bridging loans are right for you.
Paresh Raja has an extensive background at one of the Big 4 consultancy firms, specialising in structured finance, and a long-standing career in the commercial and specialist lending sector. He is therefore well placed to discuss anything bridging finance specific, or business more generally. Paresh is now the CEO at Market Financial Solutions which he has developed to become a leading name in the bridging finance space.