Bridging loans are an important tool in the real estate landscape, especially in the UK. They can provide borrowers quick access to finance enabling them to take advantage of time sensitive opportunities. Bridging loans can be divided into two categories, regulated and unregulated, each with their own implications.
What is a Bridging Loan:
A bridging loan is a short term financing solution provided by banks and other financial institutions. Bridging loans generally have a term of less than 24 months, although they can be longer. As short term financing solutions they are often used in order to take advantage of a limited time opportunity. Bridging loans are used for a variety of reasons, but generally they are used to “bridge the gap” between an expected income and a current expense. One of the most common uses for a bridging loan is when a borrower requires funds to purchase a new property before they have sold their current property. In this case the bridging loan would be provided to assist with the purchase of the new property and repaid once the old property has been sold. In this way, bridging loans enable borrowers to access liquidity on an otherwise illiquid asset. Interest on a bridging loan can either be serviced or rolled-up. Rolled-up interest is where the interest is retained and settled at the end of the loan term. Rolled-up interest is a popular choice for borrowers who have liquidity constraints or simply wish to pay the interest in one lump sum payment. Serviced interest, on the other hand, is where the interest is serviced throughout the term of the loan. Another important aspect of bridging loans is the planned exit. Given the fact that bridging loans are provided on the basis of a future event happening, lenders will consider the certainty of that event occurring. It is therefore important that the planned exit is a highly certain event. The bridging loan market in the UK is very developed, with a large number of different bridging lenders, each with their own products. One of the biggest distinctions in the bridging loan market is the difference between regulated and unregulated bridging loans.
What is a Regulated Bridging Loan:
A regulated bridging loan is one that falls within the Financial Conduct Authority’s criteria, subjecting it to certain rules and regulations. In order to be classified as a regulated bridging loan, the borrower must inhabit the subject property. Regulated bridging loans are restricted to a maximum term of 12 months and can only be used for a handful of reasons. One of the most common reasons for a regulated bridging loan is the renovation or refurbishment of the property. Similarly to unregulated bridging loans, regulated bridging loans require a defined exit strategy. Another way in which regulated bridging loans differ from unregulated bridging loans is in their application process. Regulated lenders are required to conduct an in-depth analysis of the property and the borrower to ensure that they can support the bridging loan. This has an impact on the speed at which regulated bridging loans can be provided.
What is an Unregulated Bridging Loan:
Unregulated bridging loans are used in the case where the borrower does not inhabit the subject property. This makes unregulated facilities attractive to buy-to-let landlords and property developers. Due to the fact that the subject property is not the borrower’s primary residence, the lenders are not required to conduct such in-depth compliance checks. The result of this is that unregulated bridging loans can be provided quickly and with greater flexibility. In fact, unregulated bridging loans can be used for a number of different reasons, as long as there is a defined exit.
How can an Independent Mortgage Broker Help You:
The process of acquiring a bridging loan can be complex and time consuming. In this way, the services of an independent mortgage broker can be invaluable. Given the sheer number of bridging lenders, each with their own products, it can be a difficult task to locate the right product. Independent mortgage brokers can leverage their network of bridging lenders to help you find the product and lender that are best suited to your funding requirements. In addition to this, brokers have an in-depth knowledge of the industry and can use their various skills to ensure that their client’s needs are protected. As previously discussed, independent mortgage brokers can help you to better understand the difference between regulated and unregulated bridging loans and what their respective implications are. It is therefore important that you consult your mortgage broker prior to applying for a regulated or unregulated bridging loan.