Compared with mainstream mortgages these are astronomical and at a glance most brokers would dismiss them out of hand. However, bridging finance is not a
replacement for a mainstream mortgage but a product for specific needs. The so-called classic bridge helps home movers buy a house before they have finalised the sale of their current home.
But the credit crunch has helped the sector grow because some banks have dropped out of many areas of lending leaving clients in the lurch. With some individuals’ property port-
folios threatened and others struggling to get finance for renovations, bridging steps in as a short-term rescue plan. Lack of finance elsewhere and the potential to charge high rates have led to a deluge of fresh lenders and greater prominence for the sector. Despite its growing profile many
brokers remain unfamiliar with how bridging works and when it is appropri- ate to use.
Regulated and unregulated bridging One confusing area is whether the sector is regulated. Put simply, regulated loans have to comply with the rules of the Financial Services Authority while un - regu lated ones do not. Unregulated bridging loans are used
for buy-to-let and investment deals whereas regulated loans are used if the borrower is going to live in the property. Julian Ingall, director at Coreco Spe- cialist Finance, part of Coreco Group, says the majority of the bridging market doesn’t deal with regulated loans. “Lenders argue there simply isn’t a big demand for it,” he says. “We don’t do a lot of regulated loans because it’s usu- ally development of a current house or property bought at auction. “For regulated bridging there needs to
be affordability checks so clients can normally get finance from their banks.” The European mortgage directive is
The
proposing all bridging loans come under its auspices but implementation could be some years away. The current complex situation invol -
ves both unregulated and regulated loans, authorised and unauthorised len - ders, and authorised lenders offering both regulated and unregulated loans. Adrian Bloomfield, director of the
Association of Short-Term Lenders, says compliance is different on regulated and unregulated loans. “There is a world of difference bet -
ween regulated and unregulated loans,” he says. “A regulated loan is one that has to
comply with the rules and regulations of either the FSA or Office of Fair Trading if it falls under the Consumer Credit Act.”
In the Mortgage Market Review the
FSA stated that regulated bridging had declined since 2007, meaning almost all growth was coming from unregulated loans.
Regulation is coming While the FSA has no control over unregulated loans it has naturally begun to express greater concern about them. In its final MMR paper the FSA pro-
posed regulating bridging further for the first time in its consultations. The move came in the wake of an FSA fine for Fast- money and warnings over the misuse of bridging late last year. The MMR proposes that bridging is defined as a regulated mortgage contract of 12 months or less.
It also plans to ban speculative bridg- ing and highlighted concerns over the quality of underwriting and bridging being used to repair credit or as a last resort. The extra clarity is partly driven by the FSA struggling to obtain data and determine the size of the sector. Despite the moves there was some
relief in the bridging sector that short-term and long-term lending con- tinue to be treated separately.
guide to Bridging Finance 2012 5
GUIDE TO BRIDGING FINANCE
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