Everything you need to know about Unregulated bridging finance
One of the most important financial tools available to modern investors and developers is the bridging loan. This type of finance provides a vital link for many high-value transactions, and is crucial to the property development industry. Unregulated bridging loans are widely used for commercial purposes, and are well suited to an enormous variety of different needs.
First of all, let’s explore what a bridging loan is. Simply put, a bridging loan helps to “bridge the gap” while long-term financial solutions are found. Let’s say you’re a property developer looking to purchase a promising building for renovation. You agree on a price with the seller, but they need the money in just a few days; there’s no way your bank will hand over the hundreds of thousands (or even millions) of pounds you need in that space of time. With your own capital tied up in equity you have few options for finishing the deal. Here’s where bridging lenders come in.
A bridging lender doesn’t look at how much you can repay each month; they look at your exit strategy. This is how you intend to repay the money they lend you, and there are three main ways to do so:
Sale of the property
Remortgaging with a traditional lender (such as a bank)
Capital from elsewhere (another sale, or another loan)
The lender will look at your experience as a developer and the potential returns on your new project. If they decide your exit strategy is solid, they’ll approve the loan and you’ll receive the money when you need it. Because they’re supplying funding to meet a short-term need, bridging lenders can work a lot faster than banks; there are far fewer boxes to check and forms to fill out. In addition, many bridging loan providers are principal lenders, so they don’t have to get the go-ahead from someone else; if they decide the loan is viable, there’s no red tape to stand in the way.
Most bridging lenders can have money in your account within a week, but if you need it faster there are many lenders who can get it to you in a few days. Some lenders can even get you the money overnight if necessary, enabling you to close the deal and move forward with your project.
A typical bridging loan will last for between 1-12 months, with interest charged monthly. In most cases, interest can either be “rolled up” into the final repayment or serviced over the course of the loan. Many lenders offer high-LTV options to their clients, with up to 100% LTV available if additional security is provided.
Buy to let properties are a great way of securing a productive investment, and landlords can use bridging loans as a fast and flexible way to purchase property
Buy to let investment is still one of the most popular ways to acquire real estate, and bridging loans are a vital tool for securing rental properties
Bridging loans can be used for almost any purpose, including the purchase of your own home. This is useful when a property chain breaks down, because it enables homeowners to proceed with their purchase even if they haven’t sold their own home yet. If you’re using a bridging loan to buy the home you’ll live in, then you’ll need a regulated loan. These loans are subject to strict criteria that limit the terms they can be offered under. Bridging loans can be expensive, so this helps to protect unwary homeowners from taking out loans they can’t afford.
For the majority of commercial purposes, though, unregulated bridging loans are ideal. There are very few restrictions on the terms that can be offered, which enables lenders to meet any requirements their clients have. There are plenty of circumstances where a borrower might need exceptional terms, or have a unique situation, and the freedom to alter lending requirements is incredibly valuable.
While most unregulated bridging lenders are not subject to oversight by the FCA, there are many industry organisations that seek to promote healthy, reliable lending practices. Groups like the National Association of Commercial Finance Brokers (NACFB) and the Association of Short Term Lenders (ASTL) hold their members to high standards of practice.
Bridging loans are exceptionally flexible, and there are very few things for which bridging finance is not used. However there are some situations where bridging finance is particularly well-suited, and can commonly be found:
Property Development: Bridging finance is ideal for property development because it provides a quick source of capital. It allows developers to access the cash they need to get their project off the ground, whereas banks can only lend once the project is complete.
Auction Purchases: When buying a house at auction, you typically only have 30 days to complete the purchase. This is far too little time to secure a mortgage, whereas a bridging lender can quite comfortably provide a secure lending package that’s tailored to your individual requirements.
Purchasing Unmortgageable Property: Some property might have great potential, but banks aren’t concerned with what it will eventually become; they will only lend on a property that meets their strict criteria. Bridging loans are ideal for renovating property because you can secure a home that’s uninhabitable (and therefore cannot be mortgaged).
Leasehold Extensions: As a property’s lease approaches expiration it becomes more and more costly to renew, and this can often prevent it from being mortgaged. A bridging loan allows you to secure a new lease, after which you can sell or mortgage the property.
Commercial Bridging Loans: Many businesses make use of bridging finance to secure property, assets or even to raise capital. This can be a great way to ease cashflow problems in the short term, and bridging lenders accept a wide variety of assets as collateral.
There are plenty more ways in which unregulated bridging loans can be used, but this list shows just how flexible this type of lending is.
The best way to find an unregulated bridging lender for your project is to contact a broker. These experts will work out which lenders are best-suited to meet your needs, and which ones have the appetite for lending on your project. Because bridging lenders are so flexible it’s absolutely crucial to meet the right one; you’re far more likely to secure favourable terms by working through a broker than you are by going it alone.
A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.
A bridging loan is regulated when it is secured against a property that is currently occupied, or will soon be occupied, by either the borrower or an immediate member of their family. All bridging loans that enable the commercial acquisition of a property or for funds to be raised exclusively for business purposes are not regulated by the Financial Conduct Authority (FCA). The split between regulated and unregulated bridging loans is roughly 50/50 now.
A 1st charge bridge is the principal loan on a property, and it takes precedence over all other charges. A 2nd charge loan meanwhile is secured against a property that already has a loan or mortgage outstanding. 2nd charge loans generally require consent from the 1st charge lender.
Closed bridging loans have a fixed repayment date. You would normally be given this kind of loan if you have exchanged contracts but are waiting for a property sale to complete. Given the greater degree of certainty around exit, closed bridges can sometimes be offered at slightly lower rates. By contrast, with an open loan there is no fixed repayment date, but you will normally be expected to pay it off within 12-18 months. Whichever kind of loan you take (and open loans are far more common) the lender will want to see evidence of a clear repayment strategy.