What is Regulated and Unregulated in Bridging Finance?

Bridging loans or bridge finance, will typically fall under regulated or unregulated activity - and this can have quite an impact on the application process, eligibility and terms that you receive. In this article, Octagon Capital aims to explain the difference between regulated and unregulated bridging - and how you can find the best product for you.

As a rule of thumb:

  • Any residential bridging is regulated (if it is their primary residence)
  • Any commercial bridging is unregulated (including offices, garages, warehouses)

 

Regulated Bridging Unregulated Bridging
70% Maximum LTV 75% Maximum LTV
First and Second Charge Mostly Second Charge
Subject to Status All Credit Statuses Considered

What is the regulation for bridging loans?

When it comes to regulated bridging loans, the FCA is the main regulator in the UK for any mortgages or deals. Essentially, they have strict regulation and guidelines in place to ensure that borrowers do not risk losing their primary residence when borrowing and there is adequate protection in place.

So typically, you can borrow against residential properties, such as buying a place for buy-to-let purposes. However, you cannot borrow a regulated bridging loan if it is secured against your own primary residence.

Part of this is the Mortgage Credit Directive (MCD) which is an EU framework for mortgage firms and is overseen by the FCA. There are a number of measures in place to offer transparency to customers, such as showing them any rates beforehand as an APRC and also giving applicants a reflective period in case they want to change their mind or request more information.

For the regulation surrounding SMCR, this is for senior managers of investment firms under the FCA - and does not apply in this case.

 

bridging finance

Borrowing against flats and places of primary residence will typically fall under regulated activity

 

Regulated bridging loans and mortgages are available by first charge or second charge

First charge loans

This refers to the 'first charge' that is taken from your bank account each month, so often refers to as your first mortgage, which could be against your main residence and property that you live at, or an investment.

Second charge loans

This refers to the 'second charge' from your bank account, taken out after your first charge. So you could have a mortgage against your home (this is your first charge) and then another mortgage or bridging loan against an investment product (this is your second charge). You can also get a second charge against your existing home, known commonly as a second mortgage.

Importantly, the amount you can borrow on your second charge is less than your first charge, since it is second in the queue when it comes to repayments each month.

You can use the same lender for both first and second charge, or use a different one for each.

 

What is unregulated bridging loans?

When bridging loans are unregulated, they are conforming to some essential guidelines, but there are a lot of flexibilities when it comes to the criteria and lending to people with adverse credit histories. Loans in this nature are commonly by means of second charge, and with faster processing and applications, they typically make up around 50% to 60% of all bridging deals (regulated rarely gets more business than unregulated in this sector).

Unregulated business is often for commercial properties including:

  • Offices
  • Petrol garages
  • Schools/ Hotels/ Farmhouses
  • Warehouses
  • Factories
  • Gyms
  • Other business purposes

 

bridging-loans
Offices will typically fall under unregulated activity

 

What does non-status bridging loans mean?

Non-status bridging means that it does not take credit status into account. So where regulated mortgages and most financial products require a strong credit score, this is not the case with non-status lending. Therefore, lenders are willing to take a view on adverse credit histories or limited credit histories and may look at other factors such as the potential value of your property and the opportunity.

 


rishi-sunak

Chancellor Sunak Proposes Immediate Change to Stamp Duty

Rishi Sunak has stated that a stamp duty cut will not be delayed, following warnings that this would cause considerable damage to the housing market. Talk of delaying the stamp duty cuts have raised fears that property purchases would grind to a halt, as many would simply wait until these cuts were implemented to save themselves thousands of pounds.

Economists and property experts have voiced their concerns over implementation of the cut, originally suggested to be put in place Autumn this year. Such experts have claimed that waiting until this long to put the cut in place could cause a deep freeze to the housing market.

Institute for Fiscal Studies’ Paul Johnson has commented that Sunak must choose to launch the stamp duty cut tomorrow or rule it out entirely, and furthermore that “To do otherwise could ruin the housing market for months to come”

Economist Julian Jessop commented the following on the matter: “the announcement of a stamp duty holiday, but not until the autumn, could kill the housing market in the meantime.” 

“There has been similar speculation of an across-the-board VAT cut, which could delay spending on other big ticket items too.”

Others have claimed that this cut to stamp duty could help to drive the demand for housing throughout the U.K., former Tory Chancellor Philip Hammond commenting on the BBC Radio 4 Today programme that:

'Cutting stamp duty, reducing VAT in particular sectors, are certainly ways to bring forward or manage demand. 

'But I think the Treasury officials who will have been working up all sorts of proposals for him during the lockdown will be telling him that the history tells us that cutting VAT or cutting stamp duty can bring forward demand but it doesn't overall increase the level of demand, it simply shifts the pattern of it.' 

This cut is expected to be part of Sunak’s coronavirus recovery package, including ‘holiday’ from the charge of six months. Sunak is under increasing pressure to set out future plans for financial support for businesses, as many sectors continue to struggle from the effects of the COVID-19 pandemic.

The stamp duty cut is said to be the focus for the Chancellor’s financial address tomorrow, which is also expected to discuss the £2 billion to be used for homeowners to better insulate their properties, and the £1 billion that will attempt to make hospitals and schools greener.


self-storage

Storage Wars: UK Cities Paying Nearly Double for Self-Storage 

  • Londoners pay 107% more per week than average for a 50 sq. ft. storage unit
  • Camden is the most expensive place to rent storage space in the UK (up to £101.63 p/w)
  • Local 100 sq. ft. units cost 8% of a Londoners average wage, 7% of Swansea and 6% of Manchester, Liverpool and Newcastle

 

New research from bridging loans broker Octagon Capital reveals the cities in the UK getting the worst deals on self-storage units, with Londoners paying significantly over the odds at a rate 107% higher than the national average.

Looking at the average cost of a 50 sq. ft. unit in locations around the country (ideal for storing the contents of a one bedroom flat), London is the most expensive, with customers likely to spend an average of £1,797 per year.

Considerably higher than second place Swansea, which has an average of £1,006 per year for the same sized unit. Exeter residents are getting the best deal in the country, paying 31% less than the nationwide average (£598 p/y).

 

Average annual cost for 50 sq. ft. unit (£) Percentage Difference from Nationwide Average
London 1,797 107%
Swansea 1,006 16%
Liverpool 958 10%
Edinburgh 892 3%
Manchester 882 2%
Bristol 833 -4%
Newcastle 803 -7%
Cardiff 765 -12%
Birmingham 745 -14%
Glasgow 700 -19%
Portsmouth 650 -25%
Southampton 650 -25%
Exeter 568 -31%
Nationwide Average 868

 

This trend continues when looking at 75 and 100 sq. ft. sized units, ideal for a two-bed flat or house, with London topping both tables and costs averaging 110% and 100% more than the average respectively. Liverpool similarly finds itself at the top end of the table for each unit size analysed, paying 12% more than average for 75 sq. ft. (£1,238 p/y) and 17% more for 100 sq. ft. (£1,674 p/y).

Camden in London has the highest individual costs per year for 75 sq. ft. and 100 sq. ft. units (£3,542 and £5,285 p/y respectively), while also placing second for 50 sq. ft. (£2,909 p/y) behind Kennington (£3,024 p/y).

Even when taking into account the average weekly wage in areas around the country, Londoners are still paying over the odds. For example, a 100 sq. ft. storage unit costs 8% of the average weekly wage of a Londoner, compared to just 3% of Portsmouth residents at the other end of the table. On average, 5% of the weekly wage would be spent on a storage unit of this size.

Dan Kettle of Octagon Capital, commented: “There are many factors that affect pricing in cities around the UK, but the large difference in costs between London and the rest of the UK is still significant when you take into account the proportion of the average wage that relates to.

“The best way to get a good deal on self-storage is to ensure you select the right sized unit so you’re not overpaying on space, and always shop around. There may be a better deal with a different company and don’t forget to try and negotiate costs.

“At Octagon Capital we provide bridging loans to assist those looking to embark on a project such as a move, renovation or refurbishment where self-storage is often needed.”

 

References 

Data consists to quotes for various sized self-storage units by Big Yellow, Safestore, Shurgard and Lok’nStore on w.c. 29th July 2020, with annual costs reflecting the weekly cost multiplied by 52

Average wage data via Centre for Cities: https://www.centreforcities.org/data-tool/#graph=map&city=show-all&indicator=average-weekly-workplace-earnings\\single\\2019

 


Gareth_Lewis_mtf

Mortgage Brokers Expect a 6 to 9-Month Recovery

The COVID-19 lockdown has had a considerable impact on the property industry, potential property buyers limited in viewing new potentials, whilst those in the bridging finance sector were forced to stop all lending, able to only work on existing deals they were already managing.

It’s been confirmed by mortgage lenders all over the U.K. that there will be significant restrictions to lending criteria. On top of this, there have not been any property auctions to have taken place recently – an important source for generating commercial deals within the industry.

An MT Finance survey found that 54% of participants predict the economy to take 6 months to a year to recover from the impacts of COVID-19, 14% seeing a recession in the foreseeable future.

In the same survey, 40% of mortgage industry brokers feel the property market will need six to nine months to recover properly from the impacts of COVID-19.

Additionally, MT Finance also found that 27% expect it to be a year or more for the market to fully recover.

Gareth Lewis, MT Finance commercial director, commented: “These results offer an interesting insight into just how long those working in the industry believe the UK property market and wider economy will take to recover.

“While the government’s furlough scheme has evidently had a positive impact on unemployment- some further government stimulus would be very welcome to resurrect the property market once lockdown is lifted, such as a stamp duty holiday or concessions.”