A bridging loan is a type of finance used to ‘bridge the gap’ between a debt needing to be paid and your main line of credit becoming available. For example, you may want to buy a house at an auction but you need the money to purchase it before you are granted a mortgage. This is where a bridging loan would become a useful financial tool.

Bridging loans are commonly used by landlords, amateur property developers, and those who wish to buy a house at auction, or sell quickly after renovations. You may also find that bridging loans are taken out by more affluent borrowers who want a simple form of finance for a residential property.

As with all forms of finance bridging loans have to be regulated. However, as there are two different types of loan, there are different regulations for each form of finance.

To help you understand how this works here is a basic guide to the different types of bridging loan and how they are regulated:

FCA regulated bridging loans

The first type of bridging loan is regulated by the Financial Conduct Authority (FCA). These loans are secured by first charges that are secured against a property that is currently, or will be, occupied by the borrower, or their close family. For example this would be the borrowers’ principal residence or a property where the borrower, or their family, occupies 40% or more of the property.

Non-FCA regulated bridging loans

If the loan is secured against investment properties, such as a by-to-let property, or business premises the loan will not be regulated by the FCA. This category can also include shops with flats above if the property does not meet the FCA’s residential qualifications.

Consumer Credit Act regulated bridging loans

In the event that the loan cannot be regulated by the FCA and does not meet their residential qualifications then the loan is likely to be regulated by the Consumer Credit Act (CCA).

This means that any lenders and brokers wishing to offer this financial service will need to hold a Consumer Credit Licence as awarded by the Office of Fair Trading (OFT) before they can deal with such loans.

In case where a loan is regulated by the CCA there will be specific paperwork involved regarding the CCA and there is also a seven day “cooling off” period involved for borrowers.

Non-CCA regulated bridging loans

There are some loans that don’t fall under the CCA regulations, for example loans to limited companies, high net worth individuals, loans for business purposes, and loans secured on investment properties.

Future regulation changes

As of April 2014 the FCA will be taking over the regulation of the CCA meaning that there are some expected consultations and changes, especially with regard to loans for business purposes.

If you’re at all worried about regulations for your bridging loan it is worth consulting your lender or broker so they can advise your actions.

By Harry Price

Harry Price is a free-lance writer and enjoys volunteering in his local community and lending support.