What are bridging loans?
Bridging loans are a way to borrow money over the short term, from just 1 day up to 2 years. They're useful if you need a large amount of money while you wait on other funds you expect to become available.
One example is if you're buying a new house but your current property is taking longer to sell than expected. Rather than losing out on the property you want to buy, a bridging loan can let you buy it straight away, then pay back the loan once you sell your current home.
Bridging loans are secured against your property or land, lending you a percentage of its value, worked out much like the Loan to Value (LTV) on a mortgage.
They can also be used for refurbishing your home, paying for a self-build property or buying a property at auction. Businesses can also get bridging loans, which can be secured against the company's stock or property.
Are bridging loans regulated?
Whether a bridging loan is regulated or not depends on how it is secured against your property: with a first or second charge loan.
What's the difference between first charge and second charge bridging loans?
A first charge bridging loan counts as a regulated mortgage contract, meaning they are controlled by the FCA in the same way as normal mortgage products.
You can get a first charge loan if you own your current home (or other asset the loan is secured on) outright, with no other borrowing on it.
Second charge bridging loans are not regulated by the FCA.
Second charge loans are when you take out your bridging loan against a property that you already have a mortgage, or secured loan on. In this case, the mortgage company or existing lender will already hold the first charge on the property, so the bridging loan counts as a second charge.
If you secure a bridging loan on a buy to let property, this will also count as a second charge.
Should you get a regulated or unregulated bridging loan?
Although bridging loan lenders that only offer second charge loans won't have been through the same checks as first charge providers, that doesn't necessarily mean they're unsafe. Many bridging loan providers offer both first and second charge loans, meaning that they'll have to be regulated by the FCA.
Some second charge loans are also regulated by the Consumer Credit Act, meaning they'll need a licence from the Office of Fair Trading. However, loans to businesses and buy to let investors aren't offered this protection.
However, as second charge lenders don't have to be given permission to lend by the FCA, they won't be held to a set of standards they have to uphold.
How to find the best regulated bridging loan
Although bridging loans are designed to get you the money almost immediately, you should still spend some time finding the best one, as they can be very expensive.
It's important to know how much you want to borrow and when you'll be able to pay it back, as you could be stuck with an expensive loan if your plans (such as finding a buyer for your current home) fall through.
Make sure you find one that will offer the amount you need over a time period that suits you. You'll also need to make sure they offer an LTV that will give you the amount you need.
Interest is usually paid monthly, so interest is quoted at a monthly rate. If you want to compare them to other types of loan, you'll need to find, work out or ask for the annual equivalent rate of each bridging loan.
They can come with high fees and charges (on top of your valuation and legal fees), so take these into account when you choose your loan. A low interest rate won't necessarily be the best deal if the fees drive up the price too much, especially if you're borrowing over a short term.
Use our regulated bridging loans comparison to look at what providers will offer what you need. You can then pick the cheapest bridging loan from the ones that suit.