Regulated Bridging Loan
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Regulated Bridging Loan
Scott West talks us through how a regulated bridging loan works, and when it’s appropriate.
What is a regulated bridging loan?
‘Regulated’ applies to any borrowing for a property that you are going to live in as your primary residence. For most people, that’s the standard mortgage you have on your home with Lloyds, Barclays, Halifax or whichever lender you choose.
Buy to Lets, investment properties and developments all use unregulated borrowing. When it comes to a regulated bridge, the regulated part just means it’s on a property for you to live in. It’s specific to borrowing for a property that will be your primary residence at some point in the future.
What is the difference between regulated and unregulated bridging finance? How do I know which loan I need?
You’ll know which one you’ll need by answering the question: “Do you plan to live in the property?” If the answer is yes, it’s regulated. If the answer is no, it’s unregulated.
The difference between the two from the client’s perspective isn’t a great deal. The difference to us, as brokers, is that there’s a lot more work in the background. All clients see is a difference in the term – on an unregulated loan you can go to 24 months, while a regulated loan is limited to 12 months maximum.
What can I use a regulated bridging loan for?
Most of the time, we don’t see a great deal of these. We mainly come across them where people are selling their current home and have found a new property to buy, but the timings don’t quite line up.
They’ll use the regulated bridging loan to purchase the new property and move into it. When the sale of their previous home goes through, they use the proceeds to repay the loan.
Nine times out of 10, that’s when we’ll see a regulated bridging loan. On the odd occasion, people use a bridging loan to renovate their current property. For example, they have a £500,000 home and want to spend £100,000 to extend it or do refurb work that you couldn’t do on a standard mortgage.
They’ll take the loan out, do the work and then either refinance onto a term loan afterwards. Or, they might repay it with pension drawdowns, bonuses or whatever it might be. This is quite rare, though.
How much can I borrow on a regulated bridging loan?
The terms will be very similar to a normal bridging loan – that is, around 65% to 70% maximum Loan to Value. That’s a gross loan. But most of the time, you probably won’t be borrowing that much if you’re doing refurb work.
If it’s a purchase, we can go to 100% Loan to Value by cross charging the two assets – in the scenario where you’re buying an onward purchase and selling your existing one. If there’s enough equity in the current one, we can put the bridging loan across that and the new home.
That way, you don’t have to put any money into the purchase – we’ll just use all the equity across both properties. You will just have to cover legal fees and valuation fees, but we can borrow 100%, or even slightly more if the equity allows for it.
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What documents will I need to provide when applying for a regulated bridging loan? Is proof of income required?
Proof of income isn’t required, but you will need to provide proof of exit. The lenders will want to see the listing for the existing property, if it’s an onward purchase. They will request a valuation or to see the valuation report to understand its saleability.
If your exit is to refinance after doing refurbishment works, the lender will want to see an offer in principle from a lender to cover that. So if you’re borrowing £50,000 for the works, they’ll want to see at least a Decision in Principle for that amount with a mortgage lender to ensure they will be repaid.
Can I get a regulated bridging loan if I’m self employed?
Yes – it runs similar to a standard bridging loan. Credit score and income aren’t hugely important. Obviously, we have to prove the exit strategy. If you have poor credit or you have no income, we can’t then say that your exit strategy is refinancing with a high street bank – it’s unlikely to go through.
That’s why the lender will want to see a Decision in Principle. As long as we can prove the exit is viable, it won’t really matter whether you’re self-employed, employed, you have a high or low income, or what your credit score is.
Are second charge bridging loans regulated?
Yes and no – it depends on the purpose. For a second charge bridging loan on your primary residence, if the use of those funds is for business it’s unregulated. If the use of those funds is for a consumer purchase, such as a car, a holiday or refurbishments on your own home, it will qualify as regulated in almost all lender’s eyes. So with a second charge, it depends on the purpose.
What happens if the loan or the regulated bridging loan is repaid early?
If the loans are paid early, there are no penalties and you will get a refund of the interest you haven’t used. Again, as with the standard bridging loan process, lenders will retain 12 months’ interest upfront. For every month you repay the loan early, you’ll get a rebate of that interest. So it’s in your interest to repay the loan as soon as you can.
Can I get a regulated bridging loan with bad credit?
Absolutely. I’ve done some before to stop a repossession, and for a client with very bad credit due to defaults and missed mortgage payments. Again, It’s just proving the exit strategy.
The clients in those examples were selling assets – they had properties for sale from their Buy to Let portfolio and they were downsizing from their primary residence to a smaller one.
There was a lot of equity in the deal. The transactions stood up, the cash was going to come out of their sales so they got a regulated bridging loan.
Do I have to pay the bridging interest each month?
No – the interest is retained by the lender. In the past a few lenders allowed you to service the debt, but with regulated loans, lenders now don’t allow you to do that. It’s purely that from a cash flow perspective they want to make sure the exit is your primary focus.
They don’t want you to be worrying about making the payments each month. It is all built up in the loan and repaid at the point you redeem.
Can I waive my rights and take an unregulated loan?
Unfortunately not – even though that would simplify things for lots of people. If that were even possible, banks just wouldn’t risk it. When it comes to your prime residence, nobody wants to make you homeless. They will always take it very seriously and this borrowing will always qualify as regulated.
How long does a regulated bridging loan take to arrange? How long will my regulated bridging application take to complete?
Those two are both the same thing, really. You can arrange a loan as quickly as two or three weeks. We tend to say to people that a four to five week timeline will give you comfort, without having to stress.
It gives the valuers and solicitors time to get their work done competently, without having to charge you extra for working at a rush. In some cases, though, we can really rush and complete very quickly – within a week. But if you think of a four or five week timeline, you won’t be disappointed.
How do I apply for a regulated bridging loan?
That’s where we can help. We will help you understand the transaction and process the exit strategy in the way that best suits the lender and yourself. We’ll also ensure you achieve the best terms.
Your home may be repossessed if you do not keep up with your mortgage repayments.
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