There are two main types of bridging loans – regulated if the security being offered is being lived in by the borrower or their immediate family, and unregulated if it is not.
Regulated loans are secured against residential property (or sometimes other personal assets) and are overseen by the Financial Conduct Authority (FCA), which is responsible for protecting consumers in the UK.
Unregulated loans are secured against property the borrower doesn’t inhabit. They’re typically taken out by businesses or professional borrowers. They’re not regulated because it’s assumed professional borrowers will understand the risks associated with short-term finance facilities.
“Some people assume that unregulated loans are bad or should be avoided, but this isn’t the case. They’re meant for professional borrowers who fully understand the nature of the terms and risks involved, thus removing the need for FCA oversight. Indeed, a lender cannot legally approve an unregulated loan for a consumer.” Alan Andrews, KIS Finance
A regulated bridging loan is secured against a property or other personal assets in which the borrower or a close family member lives. These loans must follow FCA rules.
The rules around regulated bridging loans can be a little confusing at times. For example, consumer buy-to-let (CBTL) regulation dictates that individuals cannot secure an unregulated bridging loan against a buy-to-let property they have inherited or lived in.
However, a buy-to-let property purchased by an individual (not a business) purely for investment purposes puts them in the professional borrower category and therefore they may qualify for an unregulated bridging loan.
For Example: You are held up in a property chain and take out a bridging loan to purchase a new house. Once the sale of your house clears you repay the bridge plus any additional interest. In this case, because the loan pertains to a private transaction and is secured against a residential property, it must be regulated.
An unregulated business loan is secured against commercial or mixed-use property that neither the owner or a family member inhabits. Sometimes, high-value consumer loans may also fall out of the scope of FCA regulations, but this is relatively rare.
Professional borrowers take out unregulated loans for a range of reasons, including to purchase buy-to-let properties, complete building development work, overcome short-term cash flow issues, and more.
Theoretically, there is no cap to the amount a borrower can take out with an unregulated bridge, with some loans running into the tens of millions.
For Example: You wish to purchase a buy-to-let property at auction. Because property auction sales require payment in 28 days, you take out a bridging loan secured against another buy-to-let property in your portfolio. As this loan is secured against a non-residential property and is for business purposes, it will be an unregulated loan.
Here are the main benefits of regulated bridging loans:
If you’d like to see how much you can borrow, use KIS Finance’s completely free bridging loan calculator.
Here are the main benefits of unregulated bridging loans:
We estimate that only 1 in 12 lenders is FCA-regulated and that commercial, unregulated loans account for nearly 75% of the market. You can also use our bridging loan calculator to see how much an unregulated loan will cost.
Regulated loans must follow FCA rules. Unregulated loans, which are always used for commercial purposes, do not need to follow these rules.
FCA regulations cover a lot of ground but in essence they protect consumers from riskier loan practices. For example, lenders must follow Treating Customers Fairly (TCF) principles, conduct thorough affordability assessments, and provide borrowers with a cooling-off period (usually around 14 days) to change their mind about the loan.
Commercial bridging loans are unregulated because they cater to professional borrowers who understand the risks and terms involved. Regulation often limits the flexibility needed in the commercial sector.
Borrowers often prefer these loans because they can be arranged quickly with flexible terms, outside of the constraints of regulated loans. In addition, professional borrowers invariably have more knowledge and understanding about the loan process, associated fees, and conditions of the loan term, meaning that the need for consumer protection is much reduced.
If you are securing your loan against a residential property that either you or a family member lives in, then you can only apply for a regulated bridging loan, irrespective of what you intend to use the loan for (though this will typically be to purchase a new property).
If you are seeking a bridging loan for business purposes, the loan will be unregulated, including commercial development, land purchase and refurbishments.
Last updated: 02 August 2024 | © KIS Bridging Loans 2024