The bridging loan market is well-established in the UK with several hundreds of bridging products, each offered by different lenders. As a result of this the bridging loan landscape can be complex to navigate and difficult to understand. While bridging loans are a useful tool to prospective property developers and investors, it is important to understand how they are regulated and how their regulation can impact your investment.
What are bridging loans:
Bridging loans are a form of short term finance used to “bridge the gap” between an expected cash flow and a present expenditure. In this way bridging loans enable borrowers to take advantage of a limited time opportunity such as a property purchase. Bridging loans generally have a term of between 1 and 24 months, with some lenders offering longer terms. Given their short term, they generally have higher interest costs than traditional forms of finance, although it is important to note that interest can be rolled up on bridging loans. Rolled up interest is where the interest charges are retained and added on to the loan amount. This means that the interest is repaid at the end of the loan term, along with the capital amount, affording the borrower a greater degree of cash flow flexibility. Bridging loans are commonly used in the UK to fund the purchase of a new property before the sale of their existing property. The loan is generally repaid with the proceeds of sale from the existing property. In this way bridging loans allow borrowers the ability to take advantage of a limited time opportunity without having to wait for the sale of their existing property. Bridging loans can be categorised in a number of ways. Firstly, bridging loans can be either open-ended or close-ended. Close-ended bridging loans rely on a specific, predetermined event for repayment, such as a property sale, where the contracts have been exchanged. Open-ended bridging loans do not have a pre-determined, specific event and generally have a greater degree of speculation. A common example of an open ended bridging loan is one that relies on the sale of a property, where the property has not yet been listed on the market. Secondly, bridging loans can be categorised or unregulated.
Unregulated Bridging Loans:
Unregulated bridging loans are loans that are not subject to FCA rules. Unregulated bridging loans are more flexible than regulated bridging loans and can be used for a variety of reasons. Unregulated bridging loans have no restraints on the length of their term and can run from anywhere between 1 month and 36 months, with some lenders offering longer terms. Similarly, unregulated bridging loans can be used for a number of different reasons, from Buy-to-Let property purchases to BTL refurbishments. Given their flexibility they are an attractive option for BTL landlords, enabling them the necessary access to capital to take advantage of opportunities within the market.
Regulated Bridging Loans:
Regulated bridging loans, on the other hand, are subject to FCA regulation. The FCA or Financial Conduct Authority is tasked with protecting the interest of consumers through the regulation and supervision of financial firms and markets. Generally speaking, the FCA focuses on banking, insurance and consumer finance with the goal of enhancing efficiency and integrity in order to achieve stability within the market. While the FCA regulations can be complex and difficult to understand, there are a few important regulations relating to regulated bridging loans. Firstly, and most importantly, regulated bridging loans apply to properties which are inhabited (or will be inhabited) by the borrower or their family member. By regulating bridging loans on a borrower’s main residence, the FCA aims to ensure that lenders and brokers act transparently and fairly, protecting consumers from harmful practices. Secondly, regulated bridging loans are often restricted to ensure that borrowers are not exposed to higher interest rates for a prolonged period of time. Thirdly, regulated bridging loans can only be used for specific purposes, including:
Property purchases: One of the ways in which regulated bridging loans can be used is for the purchase of a new residence prior to the sale of an old one. This enables the borrower to take advantage of a limited time opportunity, prior to the sale of their existing home.
Refurbishments or Renovations: Regulated bridging loans can be used to fund refurbishments or renovations of a borrower’s main residence, enabling them with fast access to capital to improve their home.
Refinancing a property: Refinancing a property can be a time consuming process. In the case where a borrower’s current mortgage is due, but they have not yet secured a refinance mortgage, borrowers can make use of a regulated bridging loan to bridge the gap between the two.
Auction Purchases: Property purchases are often required to make payment on an auction purchase within 28 days. In order to meet this tight timeline for payment, borrowers can take advantage of a regulated bridging loan.
In conclusion, while bridging loans are an attractive option for property investors, borrowers should ensure that they consult with their mortgage broker prior to application. Mortgage brokers can guide their clients through the application process ensuring full compliance and understanding, protecting their clients from harmful practices. Mortgage brokers are also able to ensure that their clients fully understand the implications of any potential bridging loan, empowering their clients to make informed decisions.