If you’re in a bit of a rush when it comes to purchasing a property, but haven’t quite sorted the funds for whatever reason, then a bridging loan is the ideal short-term solution for most.
However, there are different types of ‘bridges’, each suited to a different type of borrower and why they may need the finance.
In simple terms, bridging finance is regulated if the borrower currently, or will be, living in the property that is in question. The bridging loan may also be regulated if it is secured against a mixed-use property, which the immediate family of the borrower, or the borrower themselves occupy more than 40% of.
If the bridging loan is being used specifically for investment purposes, such as buy-to-let or purchasing commercial property, then the bridging loan will not require regulation. Furthermore, it is also not regulated if it is applied for by a business or company, rather than an individual.
Regulation and Risk
Regulated bridging loans must meet certain set standards and ensure that consumers are protected under the MCOB, otherwise known as the Mortgage Code of Business rules. This sort of loan is overseen by the FCA and will have similar rules as a standard residential mortgage. The lender will want to know about a borrower’s current personal finance situation in order to asses affordability and the best exit strategy.
To see what else a lender may need to grant bridging finance, click here.
In comparison, non-regulated bridging finance doesn’t have overly strict rules. However, the downside to this is that there isn’t as much protection and, therefore, it can be a little riskier. As mentioned above, most non-regulated bridging loans will be for commercial use, so they are unique to each business’ circumstances and may use the company income as an exit. Unlike a regulated loan, the lender will unlikely want to look at the individual’s income during the process.
Speed of the Loan
There is less paperwork involved in a non-regulated bridging loan as they do not have to comply with certain rules, and fit strict criteria. More lenders offer non-regulated bridging loans for this reason, and are proven popular due to the speed that they can get approved in comparison to their regulated counterparts.
What to Expect When Applying for a Regulated Bridging Loan
• That you’ll receive a Terms of Business letter
The broker will carry out research into the type of facility you need the loan for, when you’ll be able to pay it back by, the interest rates and overall T&Cs of the loan
• A recommendation letter
The criteria for a regulated bridging loan, however, has more restrictions. Most regulated lenders:
• Will only provide one-year long loan terms
• Will allow roll up interest and the borrower will not be able to make monthly interest payments
• Will limit exit routes to refinance or the sale of the property. Some lenders may even only accept sale as a legitimate reason to exit.
If you’re unsure whether you need a regulated or non-regulated bridging loan, then the best thing to do would be to get in touch with a reliable bridging finance broker, such as Pure Commercial Finance, who will be able to steer you in the right direction.