Regulated Bridging

Bridging secured on a house you or your immediate family live in?

There are additional rules attached.

Regulated bridging can both protect and annoy you.

Regulated bridging loans are known as such because they are regulated by the Financial Conduct Authority (FCA). The FCA regulates certain bridging products to protect those wanting bridging finance as well as ensuring fair competition between brokers and lenders. Regulated bridging loans can be first charge or second charge. They differ from non-regulated bridging loans as they are secured against the property that is occupied or soon to be occupied by the borrower or their family. 

Bridging loans aren’t based on credit or income meaning the lender will not need to browse your business and employment history so closely. They are instead based on assets or property that are used as security to reduce risk to the lender. As a result of this, bridging loans are a quicker product to apply for and obtain.

The typical bridging loan consists of a 12 month maximum term (although unregulated products can have an 18 to 36 month term) with rolled up interest options. Rolled up or capitalised interest means that the borrower doesn’t make monthly repayments. Instead the interest is added to the loan. The main upside is there are no payments to make each month which can really help with cashflow. The main downsides are effectively borrowing the interest so paying interest on interest. This chunk of interest is deducted from the gross loan so you might end up with less in your hand if equity is marginal.

In addition, a strong exit strategy is essential between the lender and borrower to help you pay back the finance initially borrowed.

Uses for Regulated Bridging loans

There are several reasons why you may consider a regulated bridging loan to help you out. One use would be to help renovate your current property or to help with renovation costs on a property you are potentially moving into. Often people want to buy a new house before they have sold their current home and a bridging loan can help do that. Another use would be to help buy a house at auction. You could also use regulated bridging loans in conjunction with breaking/fixing property chains. 

Property Renovation

If you are struggling to balance your mortgage payments with home renovations then a bridging loan could be a viable option. Also, if a particular property is unmortgageable, a regulated bridging loan could cover the renovation costs. As a result, making the property mortgageable again. If the money you had already set aside has been used up and there is still more work to be done, a regulated bridging loan could provide you with the financial help to complete the work.

Regulated bridging at auction

Regulated bridging loans are also a good idea when going to auction. You can pre-agree auction finance in advance. So when you win at auction, you can move onto the next step sooner rather than later. Bridging finance at auction could help you acquire:

• Land
• Commercial and semi commercial buildings
• Residential properties
• Buy to let properties

When you buy a property at auction, on the day you win the auction, you’ll have to pay an initial 10% deposit. If you cannot supply the 10% deposit, you can secure the 10% on another property if required. Plus, you will have to sign a contract that legally binds you to pay the remaining 90% within 28 days. A regulated bridging loan will help “bridge the gap” towards acquiring the property and getting a long-term mortgage.  

However, don’t be complacent. Make sure you have discussed your proposed bridging loan and got the ball rolling before you bid.

Property chains

A property chain is a succession of properties that have buyers and sellers linked with each other. For example:

• Firstly, person A is selling their house.
• Then, person B wants to buy person A’s house. 
• Person C wants to be person B’s house.
• Person B can’t buy A’s house until person B’s house gets sold to person C. 

Inevitably, this can continue on in a long chain hence the term “property chain”. Property chains start with someone who only wants to buy a property and it finishes with someone who is only selling their property. 

Regulated bridging can help with fixing or minimising the risk of chain breaking. Common property chain breaks include:

• The transaction from mortgage application to sale completion taking a lot longer than expected.
• The buyer pulling out of the sale of the house
• Lenders withdrawing financial support due to issues regarding funds

If your link in the property chain seems slow or it is close to breaking, bridging could help re-secure your link in the chain. You fully purchase your new property with cash and then you payback the bridging loan with the funds raised from selling your old property. 

Property downsizing

It’s common for people to use bridging to buy their next property, particularly older borrowers who want to down size. Often they have a small or no mortgage so there is equity across their current property and the one they wish to buy, to complete the purchase with ease. This allows them secure the house they want and repay the bridging loan when their current property is sold.

Potential issues with regulated bridging

Of course, with most things there are drawbacks to bridging loans that could put you off applying for one later down the line. 

Exit

As the loan is regulated, the maximum term allowed is 12 months. therefore you need to have an exit within 12 months to fully repay the bridging loan. If the exit is sale of another property the lender will expect it to be on the market from the outset. If the exit is to refinance, your broker will be required to evidence this is possible at the outset.

Repossession

If you cannot pay the loan back at the end of the term; the lender is well within the rights to sell your property as collateral to recover the debt. They can sell your property at a price allows them to cover the outstanding loan amount, often by auction. However, as the loan is regulated they are required to show significant forbearance and treat you fairly.

Costs and fees

Costs could potentially pile up with bridging loans. Make sure that your investment has ample margin to cover interest and any fees involved. These can be explained to you at a very early stage and could include:

Broker fees

Brokers compare the whole-of-market to help find the best deal for you as well as the range of available mortgage products. Also, they calculate affordability for you, for the most cost effective loan. Lenders will also run through all the terms and conditions and manage all the paperwork for you. As a result of all this, a fee may be charged for all the work they do throughout the process.

Valuation fees

This for the property valuation required with the bridging loan. This can be paid to either the lender or the surveyor and costs will vary depending on location, asset value and how thorough the valuation check is. It could be either a desktop valuation, drive-by valuation or full on-site valuation. Ask your broker to try a desk top valuation and they will normally absorb this cost.

Solicitor fees 

A solicitor will be hired by the lender to work through any legal processes. As a result, in addition to your own legal costs, you may also have to pay the lenders solicitors costs. 

Exit fees

Not all lenders charge this fee. But some lenders could charge a redemption fee or exit fee. Exit fees are administration fees that you could have to deal with when you either move your loan agreement to a different lender or when you have reached the end of your loan term. Therefore, it’s always a good idea to look through the mortgage documents before signing them off.

Higher interest rates

One other potential concern regarding bridging loans is their high interest rates. This is due to bridging loans being a shorter term option when compared to mortgages. As a result of this, the interest on the loan is charged at a monthly rate instead of the usual annual percentage rate (APR). This means the interest on the loan will be compounded more regularly, and so the total cost of the loan will be more.

In conclusion, bridging finance helps with the acquisition of commercial and semi commercial buildings, residential houses, buy to let properties and plots of land. In addition to that, it is also good for when you may need a little extra funding at a property auction. Due to certain bridging loan products being regulated, that also garners extra security as they are watched over by the FCA. 

Of course, there are risks associated with bridging finance, such as the potential of losing your property and increased costs. But, assuming you cover your costs required on the term and read through all of your documentation, you should be able to avoid financial turmoil. If you have any questions regarding regulated bridging finance, speak to one of our professionals here at Promise Money.