Unregulated bridging loans: when does speed justify the cost?
Sometimes the challenge with a property purchase is not whether the numbers work, but whether you can complete within the timescale available. You may have found the right commercial property at the right price, yet the deadline leaves limited time to arrange the finance.
An auction purchase is a good example. With completion required within the period set out in the auction conditions, a conventional commercial mortgage may not fit the timetable. This is where businesses and property investors may start considering an unregulated bridging loan. Before proceeding, however, it is important to understand how the borrowing works, what it will cost and how it will be repaid.
What is an unregulated bridging loan?
An unregulated bridging loan is a short-term loan secured against property or land where the borrowing falls outside the FCA’s regulated mortgage regime. Whether a loan is regulated depends on the borrower, how the property will be used and the structure of the transaction, so the position needs to be considered for the individual circumstances rather than assumed from the property description alone.
“Unregulated” does not mean there are no rules or that lenders do not assess the transaction. They will still consider the borrower, the property, the amount required and how the loan will be repaid. An FCA-authorised broker or lender may also arrange or provide finance that falls outside the regulated mortgage regime, so it is important to understand which protections apply to the proposed agreement.
When can commercial bridging finance make sense?
Commercial bridging finance can be useful where a transaction has a genuine deadline and longer-term finance cannot be arranged within it. For an auction purchase, for example, a commercial mortgage may be suitable for the eventual borrowing, but the lender’s underwriting, valuation and legal work may take longer than the completion timetable allows.
That does not necessarily mean the bank has rejected the business or the property. Sometimes the issue is simply that the finance process and the required timescale do not line up. Bridging finance may provide an interim route, subject to the lender’s assessment and the necessary work being completed.
Speed alone, however, is not a reason to use it. The cost of borrowing needs to be justified by the transaction, with a realistic repayment plan and enough room to manage potential delays. It is also worth assessing whether another funding route, or an agreed change to the timetable where possible, would better support the purchase.
What should you consider beyond the interest rate?
The headline interest rate is only one part of the cost. Depending on the facility, there may also be arrangement fees, valuation costs, legal fees, broker fees and exit charges. These should be considered together over the period you expect to use the loan.
How interest is charged matters too. It may be paid during the term, retained from the advance or added to the amount repayable, depending on the agreement. This can affect both the funds available to complete the transaction and the amount needed to repay the borrowing.
It is sensible to consider what happens if the property takes longer to sell or the intended refinance is delayed. Additional interest, extension terms or other charges could affect the overall return, and an extension should never be assumed. Before proceeding, you should understand the repayment deadline and the consequences of being unable to meet it.
Why an exit strategy matters for bridging finance
An exit strategy is the plan for repaying the loan. That might involve selling the property, refinancing onto longer-term commercial finance or using another clearly identified source of funds. It needs to be realistic within the agreed term and supported by more than an expectation that circumstances will improve.
If repayment depends on refinancing, consider what the future lender will need to see. The property’s condition, valuation, rental income or the trading business’s financial position may all be relevant, depending on the proposed borrowing. Any work needed to meet those requirements should be factored into the timetable from the outset.
Being able to complete quickly is only part of the decision. There also needs to be a credible repayment route, alongside consideration of how the loan would be repaid if the planned sale or refinance takes longer than expected.
When a property finance exit needs to change
In a previous case, a client had relocated a car dealership after operating from a city-centre site for 12 years. An agreed sale of the land subsequently collapsed during the Covid-19 pandemic, and the site was instead let to tenants. This change of use meant the existing development finance needed to be repaid within six months.
Arranging the replacement finance brought further challenges. The proposed refinance took two months to receive a lending decision, the valuation came in lower than expected and a tenant withdrew shortly before completion.
We worked with the existing lender to negotiate a longer, staged exit, helped put formal leases in place to support affordability and ultimately secured a long-term commercial investment mortgage. The client was able to refinance and avoid the land being auctioned by the existing lender.
Although this involved development finance rather than a bridging loan, it illustrates why the repayment route needs careful assessment and may need to be revisited when circumstances change. Our case study on refinancing a former car showroom site explains the situation and the work involved in more detail.
Is an unregulated bridging loan right for your business?
Unregulated bridging finance can be useful where there is a genuine time constraint, the overall cost makes commercial sense and there is a realistic exit strategy. Its suitability depends on the whole transaction, including what needs to happen after completion.
At FundingRound, we consider short-term bridging and longer-term commercial finance in the context of your property and business plans, including purchases at auction. Our property finance service helps assess the available routes and identify a structure suited to the circumstances.
If you are working towards an auction deadline or another time-sensitive property transaction, speaking to us early gives us more time to assess the options, understand what lenders will need and consider how the borrowing will be repaid. Contact FundingRound to discuss your plans.
Finance is subject to your circumstances and the lender’s assessment. Property used as security may be repossessed if you do not keep up repayments. You should understand the terms, costs and protections applicable to any proposed agreement and take independent legal advice before proceeding.