How bridging loans work

Sometimes a buyer or a business needs money for a short while, until a sale completes or a longer loan is in place. A bridging loan is borrowing taken to cover that gap.

A loan for the gap

The Financial Conduct Authority (FCA) describes a bridging loan as a temporary financing solution. The borrower uses it while moving to another financial arrangement for the land.

So the borrower needs to know, before signing, how the loan will be paid back. That might be the sale of a property, or a longer mortgage taken out later.

When a bridging loan is regulated

Some bridging loans are regulated by the FCA as mortgages, and some are not. The FCA's guidance sets out when a loan counts as a regulated mortgage contract. Three conditions apply at the time the contract is made.

The FCA names bridging loans among the kinds of secured lending this can cover. It also lists exclusions, and some bridging loans fall within them.

Business borrowing and mixed buildings

One exclusion is for business borrowing. A loan taken wholly or mainly for the borrower's business is excluded when less than 40% of the land is lived in by the borrower or certain relatives.

The FCA gives an example. A business that borrows against homes it will sell to someone else, and will not live in, can fall within this exclusion.

A building can also be part home and part business. In the FCA's example, a family lives in half of a six-floor building and the other half is let to businesses. A loan secured on that building meets the definition.

So the answer turns on who is borrowing, what for, and who lives on the land.

What an offer should set out

For mortgages, the FCA's rules lay out a standard information sheet called the ESIS. Its headings make a good checklist for any secured offer, a bridging offer included.

Checking a firm

The FCA says almost all financial firms in the UK must be authorised or registered by it. Its Firm Checker shows whether a firm is authorised, and whether it has permission for the service it is offering you.

The FCA also keeps a Warning List of firms it believes are working without its permission. A firm can be missing from that list and still be unauthorised, because such firms often change their names.

Some scammers copy the details of genuine firms. If a financial business contacts you out of the blue, the FCA asks you to reply using the contact details on the Firm Checker.

Dealing with an unauthorised firm takes away two protections. The FCA explains that you could not take a complaint to the Financial Ombudsman Service, and the Financial Services Compensation Scheme would not cover you if the firm went out of business.

If payments fall behind

GOV.UK explains that a mortgage lender might start court action to repossess a home when payments are missed and no repayment plan is agreed. Before it can repossess, the lender must tell the borrower how much is owed. It must also consider a request to change the way the borrower pays.

Free advice is available from Citizens Advice, National Debtline, Shelter and local councils. The law on repossession in Scotland is different.

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