Bridging loans are certainly on the rise as of late, with more borrowers turning to them as a means of funding larger purchases that must be made quickly. Property developers, as an example, have found bridging finance especially useful, as bridging loans can be used to raise large amounts of capital almost immediately, perfect for snatching up opportunities in a competitive market. However, when your investment is on the line, it’s vital to know what risks you are open to, especially when using a fairly niche form of finance. As such, many prospective borrowers are asking – are bridging loans regulated by the FCA?
In this article, we will answer this question, discuss the types of available bridging loans, and give you the information you need to make an informed decision. Let’s get started.
What is a bridging loan?
A bridging loan is a type of secured loan that aims to raise large amounts of capital in a short space of time. Given its applications, a bridging loan is an inherently short-lived type of loan, with the average bridging loan term lasting less than 12 months. While this short time frame might seem highly restrictive, it is intentional, as bridging loans are designed to bridge the gap between a purchase and a long-term form of finance. As such, 12 months is often much more than necessary.
Although bridging loans are incredibly useful and flexible, they do come with comparatively more risk than other loans. As they are a type of secured finance, bridging loans require assets to be used as collateral to secure the loan against. Once a bridging loan application is approved, the lender will place a lien on collateral assets. This entitles the lender to repossess said assets in the event the borrower defaults, as a form of repayment. As such, bridging loans can be unsuitable for borrowers in precarious financial positions.
In addition to the risk of losing assets should the borrower default, bridging loans have another risk, though one that can be mitigated. This risk depends on who the bridging loan lender is, and what regulations they are subject to. If you obtain a regulated bridging loan from a reputable source, you will naturally assume less risk than if you opt for an unregulated bridging loan. However, this isn’t to say that unregulated bridging loans are always risky, or that regulated bridging loans are appropriate for every scenario. Both have their pros and cons, and the needs of your situation are the deciding factor.
Types of bridging loans – regulated and unregulated
When deciding on which bridging loan to go with, it’s easy to be overwhelmed by the number of choices on display. There is no shortage of bridging loans available to would-be borrowers, and settling on the right one for your situation can be difficult. That said, bridging loans fall into one of two categories – regulated and unregulated. If you can determine which category meets your needs, finding a bridging loan that suits you can be easier. As such, understanding the differences between regulated and unregulated bridging loans is vital.
What is a regulated bridging loan?
Regulated bridging loans are the first category of bridging loans. Broadly speaking, this category of bridging loan is less risky than its counterpart, with a larger number of checks on the borrower and their finances. Borrowers will also need an exit strategy, which refers to an alternative means of repaying the loan in the event the borrower’s financial position changes. In most cases, this will be the sale of an asset or property, or the acquisition of a long-term loan. This better ensures that the borrower will be able to make repayments, leading to fewer defaults and asset seizures. Moreover, regulated bridging loans boast a wider range of interest payment options, including rolled-up interest payments.
Although there are several noteworthy advantages to using regulated bridging loans, it does have its downsides. Namely, the increase in checks and other paperwork restricts the process, slowing it down and making it less flexible. If you require a bridging loan to quickly cover an unexpected shortfall during a project, or snap up a fleeting opportunity at a property auction, this category of bridging loan may not have the agility you need.
What is an unregulated bridging loan?
Unregulated bridging loans are the second category of bridging loan, acting as the counterpart to regulated bridging loans. This category is essentially the mirror image of the former, being much more flexible in terms of application and approval, at the cost of being riskier for the borrower. Unregulated bridging loans have a wider range of uses and less stringent checks during the application process, allowing them to be tailored to the borrower’s unique situation.
However, unregulated bridging loans are exactly that – unregulated. Borrowers will have to seek out these bridging loans from private lenders that aren’t beholden to a wider authority, making it easier to encounter scams or other unscrupulous activity if you aren’t careful. Whether the increased flexibility is worth the increased risk is up to you.
Who regulates bridging loans?
Bridging loans are regulated by the FCA, or Financial Conduct Authority. This authority is responsible for enforcing regulations in the financial services sector, including bridging loans and lenders that offer the service. This means that they will protect borrowers if a lender breaks an agreement or infringes on the regulations governing bridging loans and the broader financial services sector. Moreover, they will promote a fair market, ensuring borrowers are not knowingly given bad advice in order to misdirect them, and that bridging loan lenders operate and compete fairly. If you have issues with your particular bridging loan, contacting the FCA is often a good place to start.
Wrapping up
All in all, it is important that you carefully vet any potential lenders, regardless of what type of bridging loan you choose. Both can be exceptional tools for raising capital for purchasing a new home, development project, or anything in between, but they also come with notable risks attached. If you are still unsure, it’s a good idea to seek professional advice in order to find which loan is best for you.