Unregulated Bridging Loan
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Unregulated Bridging Loan
Simon Deeming explains how an unregulated bridging loan works.
What is an unregulated bridging loan? Are unregulated bridging loans safe?
An unregulated bridging loan is a short-term loan, typically available for 12 to 18 months. You can get bridging loans up to 80% Loan to Value – although in fact I’ve just done one at 90% Loan to Value.
They’re used for acquiring or refinancing a property for commercial use, or secured against properties that are not the borrower’s main residence.
A significant advantage of unregulated bridging finance is that it can be offered on a first or second charge basis. That means you can obtain it on a property that already has finance in place on it – a Buy to Let mortgage, for example, or a commercial mortgage.
Unlike other bridging loans, an unregulated bridging loan isn’t regulated by the Financial Conduct Authority (FCA). There’s less regulatory red tape, so it can be deployed quite quickly. Many property investors are looking to do things quickly, and leverage this type of loan in time-sensitive situations.
In terms of safety, there’s no regulatory body assessing these loans and so you won’t have the same consumer protection safety net. There’s an element of ‘buyer-beware’ to this.
What is the difference between regulated and unregulated bridging finance? How do I know which loan I need?
Each has their own set of criteria. The right way to explain it is that unregulated bridging is related to business or investment purposes. That comes with speed and flexibility, allowing borrowers to finance property developments, renovations and buy commercial properties, or even cover unexpected business expenses.
In contrast to that, regulated bridging loans are for more personal situations, associated with your own home. An example is chain break bridging – when you’re buying a house and a sale falls through, so you use a regulated bridging loan to repair the chain. It could just provide the capital necessary to purchase a new home before selling your current one.
If the borrower or their family will occupy at least 40% of the property, it will be regulated by the FCA, delivering enhanced consumer protection.
What can I use an unregulated bridging loan for?
Unregulated bridging is not just for commercial property – you could use it to buy houses or flats. The key point is that these loans are for investment purposes, not for a new home to live in yourself.
They are often used by property entrepreneurs who spot a bargain at auction. They want to fix it up and sell it on, or expand their rental property portfolio. They might be looking to buy a property that’s completely unmortgageable – it’s a real wreck, and they can’t get a standard Buy to Let mortgage on it. Sometimes they might need quick cash for an opportunity that just won’t wait.
What documents will I need to provide when applying for an unregulated bridging loan? Is proof of income required?
It’s quite different to getting a regulated mortgage, where the lender is assessing you as a person and your income.
The main thing for an unregulated bridging lender is the value of the assets and their assessment of your exit plan – that’s how they are going to get paid back. Is it a profitable deal? Is there enough leeway within the deal to confirm that it’s profitable? If so, the lender will be confident of being repaid.
In some situations, a bridging lender might require proof that you can get a standard mortgage at the end of the term. That would normally be a Buy to Let mortgage. Again, that exit strategy is not typically based on income.
Apart from that, there are all the standard requirements like ID, address verification and details of the property. You need to demonstrate a clear understanding of how you plan to use the funds.
There are some situations where lenders would require proof of income, but there’s a different emphasis from the regulatory mortgage world.
Can I get an unregulated bridging loan if I’m self-employed?
Yes. The processes and eligibility requirements don’t exclude or penalise the self-employed.
You’d just be required to submit the same things I mentioned – ID, proof of address, property details, exit strategy. You’re not treated any differently. I wouldn’t worry about it at all.
Can I get an unregulated bridge loan with bad credit?
Yes. That’s quite an attractive feature of these loans. Sometimes unregulated bridging lenders do charge a bit more for someone with credit blips or a bad credit history.
The lender isn’t assessing you as a person so much as assessing the deal and the likelihood that you will be able to pay them back.
If you have bad credit and are unable to get a regulated mortgage for a home you’re living in, but you really want to get into property investment, unregulated bridging is a good way to cut your teeth. It can help you start building your property portfolio.
Then, in a few years time when your credit profile has repaired itself, you can start refinancing properties on the Buy to Let market. This type of loan could actually help improve a credit rating. It could be certainly used as a strategy to give your credit profile time to repair while you build equity in a portfolio.
Lenders often recognise that a poor credit score isn’t a reflection of the current situation. They offer finance based on the value of the property you put up as security, together with the exit strategy. As long as those factors are strong, lenders could be pretty lenient around poor credit history.
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Do I have to pay the bridging interest each month?
Bridging loan interest is slightly from standard mortgage interest because interest rates are monthly rather than annually. The good news is that borrowers will typically only pay interest for the duration of the loan. So, for example, if you exit your bridging loan within three months, you’ll only pay three months’ interest, even if your original term was 12 months long.
Borrowers can also roll up the interest onto the loan. For some clients that can be very attractive for cash flow purposes. When you pay off the loan, your redemption repayment will include the original loan amount plus the accrued monthly interest.
So you can either pay the interest monthly or it can be rolled up. If you choose the latter, there’s no monthly interest to pay. It’s very good for cash flow.
Can I pay back the money early? What happens if the unregulated loan is repaid early?
With many unregulated bridging finance products you can make monthly interest payments, or you can make the full repayment before the agreed term. Some lenders might charge a minimum of three months’ interest, even if you pay it off after one or two months. Others might only require you to hold it for one month, or will just charge you one month’s interest.
If you do want to make early repayments without penalties, check your loan agreement or ask your broker.
How long will my unregulated bridging application take to complete?
It very much depends on the lender and the complexity of the application. In general, it can take a few days to a couple of weeks to arrange unregulated bridging finance.
If it’s really urgent, just make sure you tell your broker from the outset. This is why bridging is very popular among investors and developers who need access to funding quickly. We see it in auction purchases all the time.
The process is: initial enquiry, the application gets underway, and the lender requests documents such as ID. They often use apps to get the information. They get the property details from you or your broker and check that there’s a comprehensive exit strategy.
Then there’ll be a valuation, legal checks and eligibility assessment ahead of the lender’s offer. Some factors might slow down an application, so it’s best to have accurate information up front to avoid incomplete documentation or issues with the exit strategy.
If you’re thinking about auction purchases and want quotes for bridging finance, it’s always worth getting the advice of a bridging finance advisor.
What’s the benefit of an unregulated bridging loan?
It provides finance for business ventures and property investment, where traditional mortgages aren’t suitable.
Unregulated bridging loans are flexible, especially to borrowers who have complex financial situations, including credit or income issues. That’s because the lenders in this space focus on the property value, the exit strategy and the potential profit of the investment.
Unregulated bridging loans are also available as a second charge. If you’ve got a Buy to Let mortgage in place already, and you’ve got lots of equity in the property, the lender may still supply finance. There are lots of situations where these loans can be beneficial.
How can a broker help here? Is there anything else to add?
I think it comes down to experience and knowledge. As an example, an existing client came to me having seen a deal for a chapel. It’s got planning permission, and he wants to refurbish it and turn it into the house it’s got planning for.
I’ve seen these deals before and I know that graveyards are a real problem. He’s now getting more detail off the back of my prior experience in these cases. Seeing your broker is a little like having a business partner, in a way. It’s really important to get a good broker on board to chat to you about the options.