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Regulated and unregulated bridging loans differ in the level of regulatory protection they offer to borrowers.

Regulated bridging loans are subject to regulations set by the Financial Conduct Authority (FCA) and offer greater consumer protections. They are typically used for residential properties that are either owner-occupied or intended for occupation by a close family member. Borrowers of regulated bridging loans have the benefit of certain consumer rights, such as receiving clear and transparent information about the loan terms, interest rates, fees and charges, as well as access to the Financial Ombudsman Service (FOS) for dispute resolution.

Unregulated bridging loans, on the other hand, do not fall under the regulatory framework of the FCA and are typically used for non-residential properties or investment purposes. Borrowers of unregulated bridging loans do not have the same level of consumer protection as they do with regulated loans, and the terms and conditions of the loan are negotiated directly with the lender. Unregulated bridging loans may have higher interest rates, fees, and fewer legal requirements compared to regulated bridging loans, but they also offer greater flexibility in terms of loan terms and eligibility criteria.

Open and closed bridging are two types of bridging loans that differ based on the timeline for repayment and the availability of an exit strategy for the borrower.

Open Bridging Loan: An open bridging loan is a type of bridging loan that does not have a fixed repayment date or a specific exit strategy in place. This type of loan is typically used when the borrower has not yet secured a long-term financing solution, such as selling a property or obtaining a mortgage, and requires flexibility in the repayment timeline. Open bridging loans are generally considered higher risk by lenders due to the lack of a clear repayment plan and may come with higher interest rates and fees as a result.

Closed Bridging Loan: A closed bridging loan has a predetermined repayment date and a clear exit strategy in place. This type of loan is typically used when the borrower has a defined plan for repaying the loan, such as the sale of a property or the completion of a mortgage application, within a specific timeframe.

Interest rates on bridging loans typically work differently compared to traditional mortgages or loans, as they are short-term loans designed to provide temporary financing until a longer-term solution is obtained. Here are some key aspects to consider when understanding interest rates for bridging loans:

Higher Interest Rates

Bridging loans generally come with higher interest rates compared to traditional mortgages or loans, assuming the loan is retained for the full term. This is because they are considered higher risk by lenders due to the short-term nature and urgency of the loan, as well as the potential lack of a clear repayment plan or exit strategy.

Payments

Bridging loans do not typically require monthly payments, as they often come with a rolled-up interest feature. Rolled-up interest is added to the loan amount and repaid at the end of the loan term or upon redemption. However, borrowers also have the option to choose monthly interest payments, which require regular payments throughout the loan term. While less common, this option may be chosen by clients who need a higher day-one loan, as making monthly payments will reduce the overall Loan-to-Value by preventing interest from being added to the loan through monthly roll-ups.

Interest Calculation

Bridging loan interest is calculated based on the monthly rate applied to the loan amount, but it is calculated over the entire term of the bridging loan. This means that the borrower pays interest on the full loan amount for the duration of the loan term, regardless of whether they have utilised the full loan amount (interest roll-up) or not.