Subsequent loans are considered to be greater risk to a lender because there is no guarantee – particularly in the case of repossession – that the full equity will be realised at sale.
This is one of the reasons these tend to be short-term loans.
Second charge bridging loans are therefore popular with buy-to-let landlords as it enables them to raise capital on the first charge loan and does not mean they will have to change any pre-existing buy-to-let finance.
The amount borrowed could be as low as £10,000 or as high as £25m, depending on the lender, and the loan could be for the space of two weeks or up to three years, depending on the client's need.
Recent regulation
But while bridging sounds straightforward enough - take out a loan on your property and pay it back within a short, agreed timeframe - and while there is plenty of choice when it comes to both lenders and types of loan - bridging finance has also had its share of regulation over the past few years.
First of all was the Financial Conduct Authority's takeover of consumer credit regulation in 2014. This means the FCA is now responsible for giving regulatory oversight to lending and credit across the UK - including some aspects of bridging.
As part of this, the FCA produced its Mortgage Market Review (MMR), which set out various parameters for lenders of both mainstream and bridging loans, along with guidelines as to how these will be underwritten, regulated and governed.
"In a nutshell", explains Mr Landy: "Regulated bridging loans are those secured on someone's principal residence, or somewhere they want to move into.
"An unregulated one is one secured against a property that will be used for other purposes - such as renovation or rental - rather than living in."
It set out its final rules in 2015, in its document: Implementation of the Mortgage Credit Directive and the new regime for second charge mortgages, which also outlined the way in which the FCA would implement the European Union's Mortgage Credit Directive (MCD).
Underwriting
Finally, in 2016 the Prudential Regulation Authority (PRA) made amendments to its rules on loan-to-income (LTI) ratios in mortgage lending. Last November, the PRA unveiled its consultation paper CP44/16, in which it suggested that mortgage lenders limit the number of new residential mortgage loans made with an LTI ratio at, or greater than, 4.5 to no more than 15 per cent of their total number of new mortgage loans.
This added to its previous rules on rental ratios, affordability and stress-testing, which means all PRA-regulated lenders will have to reassess their processes to make sure they adhere to the new rules.
