Introduction
Bridging loans are a popular lending mechanism and are increasingly used in the property market for the purchase, renovation and sale of property. It is important to understand the difference between regulated and unregulated bridging loans and when they can be used.
In order to understand the application of a bridging loan it is important to understand what a bridging loan is and how they work.
A bridging loan is a short term loan used to provide liquidity in the short term. Property bridging loans are often used in property to bridge the gap between the purchase of a property and the sale of a property. Bridging loans offer borrowers the ability to take advantage of an opportunity in the present based on a future cash flow.
Example - In this way a bridging loan can be used to purchase a new property prior to the sale of the existing property. In this case the lender would be repaid with the proceeds from the sale of the property. Interest on bridging loans can be serviced or retained.
Serviced interest means that the borrower will make regular interest payments to the lender over the course of the loan term. Retained interest is where the borrower is not required to make regular interest payments as they are added to the amount to be repaid at the end of the loan term.
Bridging loans with retained interest are an attractive option for borrowers with cash flow restraints, allowing them to service the interest in one lump sum payment after they have sold their current property. It is important to distinguish between regulated and unregulated bridging loans as this can have an impact on the borrower and the use of funds.
Regulated Bridging Loan
A regulated bridging loan is one that is used by property owners who occupy the property they require the bridging loan for. Regulated bridging loans carry a maximum term of 12 months and can be used for a number of different reasons. A common way in which regulated bridging loans are used is to fund a renovation or redevelopment of the property. Similarly to unregulated bridging loans, interest can be rolled up or serviced, allowing the borrower flexibility with regards to their cash flow requirements. Moreover, regulated bridging loans also require a definite exit strategy.
A common exit strategy for a regulated bridging loan is through the refinance of the property onto a longer term, traditional mortgage. Where regulated bridging loans differ from unregulated bridging loans is with regards to their application process. Given that the property is a primary residence for the borrower it is necessary for the lender to conduct an in-depth analysis of the property and the borrower. This can contribute to a longer application process and as a result, lenders are often constrained in respect of the speed at which they can provide these loans. A common result of this is that regulated bridging loans take longer than unregulated bridging loans.
Unregulated Bridging Loans
Unregulated bridging loans are used where the property owner does not inhabit the property. This makes unregulated bridging loans the preference for buy-to-let investors, portfolio landlords and property developers. Given that the property development finance is used solely for investment purposes, there is less need for strict compliance checks from the lender.
Unregulated bridging loans are favoured for their speed and flexibility as they can be completed quickly and tailored to the specific needs of the borrower. Unregulated bridging loans are frequently used to purchase BTL properties as traditional mortgages can take a longer time to secure. Where the FCA offers a higher degree of protection through their regulation on regulated bridging loans, unregulated bridging loans offer a greater deal of speed and flexibility. Unregulated bridging loans can be used for a number of different purposes with a variety of acceptable planned exits.
It is important for borrowers to consider whether they are applying for a regulated or unregulated bridging loan as this will greatly impact the application process. With this in mind an independent mortgage broker could provide some clarity in understanding which facility is best for their specific needs. Independent mortgage brokers have a wealth of knowledge and experience to leverage on in order to ensure that the borrower receives the right guidance when applying for a bridging loan.
Conclusion
Bridging lenders have a range of products available to borrowers, however, borrowers may be restricted to specific products as a result of FCA imposed regulations.
These regulations are put in place to protect the interest of the borrower and are an important factor to consider when applying for a loan. One of these restrictions are the regulations imposed on bridging loans. It is therefore important for borrowers to evaluate their circumstances prior to engaging with a lender.