Everything you need to know about regulated bridging finance
Ownership of real estate is one of the top investments made in the UK, and owning a home is a long-term aim for many individuals across the country. Over the course of many years, a home can soak up a great deal of cash as the owners slowly build up equity through mortgage payments, which makes a homeowner’s property a highly valuable asset. The trouble is, capital tied up in real estate is inflexible, and cannot easily be used for any other purposes. In order to realise the value of real estate for new investment opportunities, it’s necessary for homeowners to release equity from their property with a loan.
The financial landscape can change dramatically with time, and homeowners might find themselves in a position where a lump sum of capital is more immediately productive for them than the equity they hold in property. This could be to purchase a new home, a buy-to-let property, to provide funds to start business or for personal projects, and finding a fast, efficient way of converting equity into capital is vital for the success of these endeavours. Bridging loans provide an ideal solution for homeowners who wish to convert their real estate holdings into cash for investment, and this form of finance is perfect for short-term financial cover. It’s important to note that a bridging loan is a form of secured finance, and when taken out against a property’s equity it functions similarly to a mortgage; the lender is able to repossess the borrower’s property, should they fail to repay. Because of this, it’s vital that anyone considering regulated bridging finance as a way to release equity consults a financial advisor before committing to a course of action.
Bridging loans are short-term secured loans that are typically used to cover costs quickly, before long-term finances can be arranged. Standard bridging loans are unregulated - that is to say, the specific terms of bridging loans are decided by the lenders themselves, and are typically not subject to oversight. However, any loan which is secured on an owner-occupied property (as with a mortgage) must adhere to the conditions of the Financial Conduct Authority, which sets out various restrictions on how these loans must be provided. Any bridging lender who wishes to offer loans secured on an owner-occupied property must seek and receive FCA accreditation, and not all bridging providers do so. This means that regulated bridging is not available from all bridging providers, and only specialised lenders are able to offer these products to homeowners.
There are some subtle differences in the ways different bridging loans are regulated. These mainly come down to the ways in which the loan is secured against the homeowner’s property, and whether this is a first or second charge security. If the bridging lender is taking out a first charge as the security for the loan, they are the only lender financing the asset; this happens if the borrower is buying a new home, and uses a bridging loan to purchase the property, or if they’re securing against their existing home and have paid off their mortgage. In these situations, the FCA treats these loans as “regulated mortgage contracts”, and the lender will be subject to the same stringent checks as any mortgage provider.
If the borrower does not outright own the asset they’re using as security (if they’re still paying off their mortgage, for instance), then the bridging lender will only be able to offer a second charge loan. Second charge loans against an owner-occupied property are still regulated, but in a slightly different way; these are “consumer credit loans”, and though the FCA still places tough requirements on these loans they are not treated as mortgages.
Regulated bridging loans provide an excellent way of creating capital at short notice. While many homeowners think of remortgaging as their only option for raising cash, a bridging loan features several key advantages over this form of lending:
Speed:Bridging lenders are able to take a loan from initial application to approval in a very short space of time, and can even sometimes agree to a loan on the spot. Once approval is given, the money can be made available in as little as 48 hours - this contrasts massively with the long drawn-out mortgage application process.
Flexible Terms:No two borrowers are the same, and bridging lenders are often able to create a bespoke loan package that meets the needs of their customers. Because bridging providers are often the principal lenders, they can be extremely adaptable when it comes to arranging loan terms.
Situational Approach:Mortgage providers are inherently over-cautious, and will often turn down borrowers for the smallest of blots on their credit history. Bridging lenders take a more holistic approach, though, and work to understand each customer’s individual circumstances - in many cases, a bridging lender will be able to finance loans where a mainstream mortgage provider would not.
Because of these traits, bridging loans are an excellent tool for releasing equity from real estate. To highlight how a regulated bridging loan may be used to take advantage of opportunities, we’ll run through an example of a typical equity release scenario.
A homeowner has decided to extensively remodel their property, which is in need of modernisation - it’s a large house in a good area, and with a decent amount of investment could face a healthy price tag. They want to get moving as quickly as possible, though, as they’re keen to move out of the property - they turn to bridging finance as a way to quickly secure the funds they need. Upon application, they outline their proposal: turn their £300,000 home into a £500,000 home by investing £100,000 in remodelling and refurbishing, with the intention of selling the property once the work is done. Although the owners are still paying off their mortgage, they’ve managed to build up a fair chunk of equity worth £150,000; since this is comfortably in excess of the £100,000 they’re borrowing, the bridging lender is happy to approve the loan.
Once funds are supplied, the homeowners quickly escalate their refurbishment project, putting the house on the market just 6 months after receiving the initial loan. They find a cash buyer for the property, and quickly close the sale, repaying their mortgage provider and the bridging lender simultaneously whilst pocketing a healthy £100,000 pre-tax profit. This illustrates the flexibility and power of a bridging loan, and how it can be used to help homeowners take the next step on the property ladder.
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.
Generally loans range from 1-24 months in duration although they can, in exceptional cases be both shorter and longer. It is wise to go for a period slightly longer than you think you need to redeem the loan given that reputable lenders will refund any unused interest if you settle them early. Bridging.com can help you to find these lenders.
Bridging loans are usually repaid from either the sale of the security property or other assets or from the re-financing of the property onto a longer-term mortgage.
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.