Bridging loans are short-term financing solutions designed to bridge the gap between the need for immediate funds and securing a long-term solution.
With the industry valued at £7 billion per year, bridging loans are popular in property transactions, often helping buyers secure a property quickly while waiting for the sale of an existing property or longer-term financing.
Bridging loans are categorised as either regulated or unregulated, and the number of deals that are funded is around a 50:50 split with each loan subject to different rules, protections and purposes.
What Are Regulated Bridging Loans?
Regulated bridging loans are supervised by the Financial Conduct Authority (FCA) in the UK, ensuring certain consumer protections are met.
A loan is considered regulated if it is secured against a property that is currently or will be occupied by the borrower or a close family member.
This typically applies to residential properties, where borrowers plan to live in the property or rent it to a close relative.
The main purpose of regulated bridging loans is to protect individual borrowers who may be less familiar with complex lending structures.
Such loans come with strict guidelines on transparency, interest rates, and fees, ensuring that borrowers have access to clear information and fair lending practices. Regulated loans also require lenders to conduct detailed affordability assessments to ensure that the borrower can handle repayments.
According to recent FCA data, approximately 50% of UK bridging loans are regulated, reflecting the high demand for residential bridging loans and the need for protection in this market.
Unregulated Bridging Loans
Unregulated bridging loans, in contrast, are not overseen by the FCA, which makes them very attractive for new bridging lenders and brokers because they can start operating immediately without licenses and other red tape.
Unregulated bridging finance is typically used for commercial purposes, investment properties, or buy-to-let properties where the borrower does not intend to live on the premises.
This type of loan appeals to professional investors, property developers making renovations or home improvements, and companies who need flexibility in financing and are generally experienced in managing property transactions.
Unregulated bridging loans offer more flexible terms, often with quicker approvals and fewer checks compared to regulated loans. However, the lack of regulatory oversight means that borrowers need to carefully examine the terms, as these loans can have higher fees, complex structures, and potential penalties.
The unregulated nature of these loans also attracts high-net-worth individuals and companies that need fast access to substantial capital, particularly in competitive property markets. Recent industry reports indicate that around 50% of bridging loans in the UK are unregulated, a number that has remained relatively stable as commercial property investment stays strong.
Key Differences in Protections and Requirements For Regulated and Unregulated Bridging
One of the primary differences between regulated and unregulated bridging loans is the level of consumer protection. Regulated loans require lenders to assess affordability and disclose all costs upfront, giving borrowers a clear understanding of the total cost of the loan. In regulated loans, there are also more stringent rules around repossession, offering borrowers added security if they encounter financial difficulties.
Unregulated loans, however, lack these protections, leaving the terms to be determined by the lender and borrower directly. This means that while these loans can be structured with flexible repayment terms and larger sums, they also carry more risk if borrowers are not fully aware of the conditions.
Choosing Between Regulated and Unregulated Loans
The choice between regulated and unregulated bridging loans often depends on the borrower’s goals and property type.
For residential buyers looking to secure a home quickly, regulated loans provide the necessary protections and structure to ensure fair terms. For commercial buyers and investors looking for flexibility in financing options, unregulated loans offer more customized solutions, albeit with less oversight.
Both loan types serve specific needs within the market. While regulated loans provide peace of mind to homeowners, unregulated loans drive flexibility for property investors. Borrowers should weigh the purpose, risks, and protections associated with each option to find the best fit for their situation.
