Bridging loans can be either regulated or unregulated, depending on how the loan is set to be used.
To understand which type of bridging loan might be right for you, it’s important to learn the differences between these two categories. Let’s explore them.
What Are Regulated Bridging Loans?
A regulated bridging loan is one that is governed by the Financial Conduct Authority (FCA), the UK’s financial regulatory body.
These loans are normally used by people who are borrowing against a property that they currently live in or intend to live in. The main purpose of a regulated bridging loan is to provide a financial “bridge” during a property transaction that involves a person’s home or primary residence.
Key Features Of Regulated Bridging Loans
Regulated bridging loans have to follow the same rules and regulations as traditional mortgages.
This means that they offer a higher level of protection, including clear terms, transparent fees and fair treatment throughout the borrowing process. Here are some of the key features:
- Consumer Protection: The FCA’s involvement means that borrowers are protected from misleading terms, hidden charges, and unfair treatment. Lenders must provide clear and accurate information, helping consumers make informed decisions.
- Regulation of Terms: The terms of a regulated loan are often more structured and less flexible as they have to comply with FCA regulations.
- Security: Typically, these loans are secured against a property that is either currently occupied by the borrower or intended to be their home. The borrower or their close family must occupy at least 40% of the property for it to qualify as regulated.
- Exit Strategy: Like all bridging loans, regulated loans need a clear exit strategy. This can mean selling the property or refinancing through a mortgage. The idea here is that borrowers have a clear way to repay the loan and avoid fines or interest changes.
What Are Unregulated Bridging Loans?
On the other hand, unregulated bridging loans are not overseen by the FCA.
These loans are mainly used for investment purposes, where the borrower is getting a loan against a property that is not their main residence. Unregulated bridging loans are popular among property developers, investors, and businesses because they usually offer flexibility and quick processing times.
Key Features Of Unregulated Bridging Loans
- Flexibility and Speed: One of the main reasons investors love unregulated bridging loans is their flexibility. Lenders can flex the terms to suit the specific needs of the borrower, allowing for faster processing times. This is particularly useful where time is of the essence, like when buying a property at auction or with a time-sensitive investment opportunity.
- Higher Risk and Reward: Due to the lack of regulation, unregulated bridging loans can carry higher risks. However, they also offer the possibility of higher returns, particularly if they are used to finance property deals or expand a business.
- Security and Exit Strategy: Like regulated loans, unregulated bridging loans are secured against property. However, the property in question is usually an investment or commercial property, rather than a home. The borrower must also have a clear exit strategy, such as selling the property after development or refinancing.
Which Bridging Loan Is Right For You?
If you are looking to bridge a financial gap when buying a new home, a regulated bridging loan might be better. This is because it offers consumer protection and clear terms.
Alternatively, if you are an investor or developer looking to finance a project, an unregulated bridging loan could give you the flexibility and speed you need.
However, it’s important to be aware of the risks and to work with bridging lenders and brokers who can guide you through the process.
The Importance Of A Clear Exit Strategy
Regardless of whether you choose a regulated or unregulated bridging loan, having a clear exit strategy is important.
Bridging loans are designed to be short-term solutions. The costs surrounding them can grow quickly if the loan is not repaid on time. Your exit strategy should account for any potential delays, and it’s always worth having a plan B.
Regulated vs Unregulated Bridging Loans
In summary, bridging loans can be either regulated or unregulated, with each type offering its own advantages and disadvantages.
Regulated bridging loans are better for personal property financing and offer a higher level of consumer protection, while unregulated loans provide greater flexibility and speed, making them ideal for commercial buyers or investors.
By understanding the differences and consulting with a financial advisor or bridging loan broker, you can choose the bridging loan that helps you achieve your financial goals.
For bridging loans against commercial and residential property assets, visit Blue Square Capital to enquire today.
