Difference between unregulated & regulated bridging loans: a brief guide

What is the difference between regulated and unregulated bridging loans?

When completing on a property transaction, finding the right loan for individual circumstances can be difficult. This is not due to the lack of products available, but the opposite. There are thousands of unregulated and regulated bridging loans on the market, which could make it hard for investors to narrow down the lender that will be right for them.

When it comes to bridging finance, there are two common types of loans available – regulated and unregulated. But what is the difference between regulated and unregulated bridging loans? How can investors determine which is the best for their property investment? To start with, let’s define the two main categories:

• Regulated bridging loans: Used by homeowners who may have found themselves falling short of funds, often due to delays. The borrower lives in the property the loan is for.
• Unregulated bridging loans: Favoured by intermediaries, property investors, developers, and landlords – often used to ‘bridge’ a payment gap. The borrower does not live in the property the loan is for, it’s solely for investment purposes.

How do I know which loan I need?

Determining if an investor needs an unregulated or regulated bridging loan will depend on the type of property they wish to purchase or bridge a funding gap for. The difference between regulated and unregulated bridging loans lays in how the funds will be used.

• If they’re looking to raise a first or second charge against a property that is the residence of the owner, then they will need a regulated bridging loan. A minimum of 40% of the property will need to be (either now or in the near future) lived in by the homeowner.
• If they’re looking to purchase or refinance a secondary property, commercial asset or a buy-to-let investment, then they can use an unregulated bridging loan. These short-term loans can be used for a range of purposes, such as expanding property portfolios, upgrading existing assets, securing auction purchases, and more.

What is a regulated bridging loan?

A regulated bridging loan relates to securing a loan against a property that is currently, or will be, occupied by the owner or an immediate family member. If other people are looking to live in the property, they will most likely need a buy-to-let loan, or mortgage. (Borrowers can read more on buy-to-lets by downloading our buy-to-let guide.)

Regulated bridging loans can be either first or second charge and share the same regulations as residential mortgages. Typically, they offer:

• A maximum term of 12 months
• Rolled up interest options
• An exit strategy based on either the sale of a property or refinancing

While there are benefits to regulation, it is also important to understand its constraints, such as:

• Multiple levels of bureaucracy
• Long processes and checks
• Delays that mean lenders cannot provide funding for tight deadlines

Who regulates loans?

The Financial Conduct Authority (FCA) regulates the financial services sector, which includes lenders that offer bridging loans. The purpose of the FCA is to protect consumers from incorrect advice and misleading behaviour from lenders and brokers, as well as promoting fair competition.

What can I use a regulated bridging loan for?

Borrowers can use regulated bridging loans for several purposes:

• To renovate a property they currently live in, or are looking to move into
• To purchase a property at auction
• To break a property chain

Remember, when it comes to repayment, using a home residency as security will put the home at risk. It may be repossessed if repayments are missed.

What is an unregulated bridging loan?

An unregulated bridging loan is a popular source of short-term finance for people looking to complete their property transaction quickly. Their flexibility allows them to be tailor made for borrower’s individual needs, and they can mitigate a lot of the constraints regulated bridging loans are subject to. Most commonly, unregulated bridging loans cover:

• Investment opportunities to expand a property portfolio
• Buying a new property before the sale of another property – keeping a chain from breaking
• Financing refurbishment or conversion works so a property can be sold for a profit (flipping)

The FCA does not offer the same level of protection for unregulated bridging loans used to secure an investment property, buy-to-let investment, or commercial real estate. Generally, while regulated bridging loans offer a higher level of protection, they sacrifice the flexibility and speed offered by the unregulated side of the market.

A quick way to determine the difference between regulated and unregulated bridging loans is to see if the lender/product is FCA regulated.

What can I use unregulated bridging loans for?

Unregulated bridging loans can be used for many of the same reasons as a regulated loan. The only difference is that when a property is bought with an unregulated bridging loan, it can’t be used by the buyer to live in. They can be utilised for:

• Expanding a property portfolio
• Investing in a buy-to-let property
• Buying a property from an auction house
• Starting or advancing a new business venture
• Raising funds against a property to purchase another asset for business purposes

How do I know I can trust an unregulated lender?

Much like how a regulated lender will follow the Financial Conduct Authority procedures, established unregulated bridging lenders will also adhere to proper and professional behaviour. Here are some of the esteemed bodies recognised in the bridging industry for unregulated lenders that help create and maintain standards for its lender members:

• NACFB
• FIBA
• BDLA
• IMLA

Market Financial Solutions is a member of all these organisations.

Can I still get a second charge with an unregulated lender?

Yes, an unregulated lender is able to lend second charges. Some lenders may also provide third charges. Due to the nature of a second charge, they can often be subject to higher interest rate rates, as the lender takes on more risk. Market Financial Solutions, as an unregulated lender, can take on a range of complicated cases. This includes refinancing, complex bridging loans, and developer exit projects.

Verdict

Overall, borrowers and brokers need to engage with established lenders who have a strong track record when it comes to deploying bridging loans. The question of what is the difference between regulated and unregulated bridging loans may not be as important as the question of which lender is right for an investor’s specific circumstances.

Borrowers may find it beneficial to speak with a financial adviser to find out whether unregulated or regulated bridging loans are right for them. It is also important that lenders educate their brokers, intermediaries, and borrowers in the different types of bridging loans available, and how they can work for them.

It’s also possible for borrowers to speak to a lender directly if they already know that the product is right for them. If any property investors have any questions regarding unregulated bridging loans, they should contact our team today.