Head of Content
Mortgage Advisor & Director
Are you considering a non-regulated mortgage for your next property investment? If so, it's essential to understand the potential benefits and risks associated with this type of financing.
In this article, we will delve into unregulated mortgages, providing you with insights and comparisons to help you make an informed decision. Get ready to explore the world of non-regulated mortgages and bridging loans, and discover if they are the right fit for you.
What is an unregulated mortgage?
A non-regulated mortgage is a loan or other form of finance which is not regulated by the Financial Conduct Authority (FCA). This means that the consumer does not benefit from the protections offered by the FCA, such as safeguarding against bad advice and misselling.
Such mortgages can therefore be more expensive, riskier and open to potential abuse, and are typically reserved for buy-to-let and commercial property investment. On the plus side, they can be much more flexible and bespoke, which can be advantageous to investors.
Regulated vs. unregulated mortgages
The key distinction between regulated and unregulated mortgages is the presence of FCA regulations. A regulated mortgage must comply with the FCA’s rules and guidelines, whereas an unregulated mortgage does not bring the same requirements.
As a result, unregulated mortgages generally have higher interest rates and deposit requirements, but lenders have the flexibility to tailor deals to the individual.
Although unregulated mortgages do not offer the same level of protection as regulated ones, that doesn’t mean they are unsafe. There are organisations maintaining standards within the commercial lending sector, including FIBA, NACFB, IMLA and ASTL.
Types of non-regulated mortgages
There are several types of non-regulated mortgages available on the market, each catering to different investment needs. Some popular types include buy-to-let mortgages, commercial mortgages and also related financial products like bridging loans.
Buy-to-let mortgages
A buy-to-let mortgage is a type of mortgage specifically designed for individuals who want to purchase a property to rent out to tenants.
Buy-to-let mortgages typically require a higher deposit and come with higher interest rates compared to traditional mortgages. The amount that can be borrowed usually depends on the projected rental income of the property. The lender will also consider the borrower's personal income, expenses, and credit history when determining the terms of the loan.
Since the borrower is purchasing a property as an investment, it's essential to carefully consider the potential rental income, as well as all expenses associated with owning the property. These expenses can include mortgage payments, maintenance costs, taxes, insurance, and other fees.
Overall, a buy-to-let mortgage can be a good option for individuals who are looking to invest in property and generate rental income. However, it's important to carefully consider all the costs and risks associated with owning a rental property before entering an unregulated mortgage contract for one. It's also vital to seek advice from a financial advisor or mortgage broker who can help you navigate the process and find the best mortgage for your needs.
Bridging finance
Bridging loans are used to provide temporary financial assistance allowing the purchase of a property before the sale of another.
Bridging loans are typically used for short-term financing needs such as purchasing a new property before selling an existing one or to fund a property renovation project. Regulated bridging loans are used for consumers who intend to occupy the property, whereas unregulated bridging loans may be used when the purchase is a commercial property.
Since these loans are not regulated by the FCA, they offer more flexibility and faster turnaround times compared to traditional lenders.
However, it's important to note that unregulated bridging loans come with additional costs such as higher interest rates, arrangement fees and legal costs. These costs can quickly add up, so borrowers need to carefully consider whether they can realistically afford the repayments. It's essential to calculate the total cost of the loan, including all fees and interest rates, to determine if the loan is a wise financial decision.
Commercial mortgages
There are for purchasing commercial property that you either intend to buy as a premises for your own business, or let out to another business or businesses (commercial buy-to-let).
Commercial mortgages are almost exclusively unregulated, but if you are buying a property that has a mixture of residential and business floorspace, 40% or more of which is residential, you will need a semi-commercial mortgage, and these are regulated.
You can read more about commercial and semi-commercial mortgages, including how they work and how to get one in our guide to commercial mortgages.
Get expert advice about unregulated mortgages
The FCA's role in mortgage regulation
The Financial Conduct Authority is responsible for regulating the financial services sector in the UK, and their main goal is to safeguard consumers and promote fair competition among service providers. The FCA ensures that lenders adhere to fair treatment of borrowers in regard to regulated mortgage contracts, adding an extra layer of security and transparency.
The FCA provides guidance on taking out mortgages, which can be found on their website. This information can be a valuable resource in understanding the protections and regulations surrounding mortgage products in the UK.
Advantages of unregulated mortgages
One of the main advantages of non-regulated mortgages is the increased flexibility they offer both borrowers and lenders.
This flexibility allows the customisation of loan terms and conditions to better suit the needs of individual borrowers, providing a more tailored approach to property financing. Non-regulated mortgages also typically provide quicker access to funds, enabling borrowers to capitalise on potential investment opportunities in a timely manner.
They can also be more relaxed with maximum borrowing caps, allowing you to potentially take out a larger mortgage, and the type of security you can use for the loan.
Potential risks
While there are benefits to non-regulated mortgages, it's important to be aware of the potential risks involved. As these loans are not subject to FCA oversight, borrowers may not receive the same level of protection as with regulated mortgages. This lack of protection can make seeking redress more challenging in the event of an issue arising.
Understanding the risks associated with non-regulated mortgages and having the necessary protection in place is crucial to minimise potential losses. This may involve taking out insurance or developing a contingency plan to protect against unforeseen circumstances.
To mitigate these risks, it is highly recommended that borrowers exercise due diligence and seek advice when considering a non-regulated mortgage. This can help borrowers understand the potential risks and ensure they have the necessary protection in place.
Equity release and regulation
Equity release products, unlike non-regulated mortgages, are FCA-regulated in the UK.
The FCA ensures that equity release firms take reasonable steps to guarantee that any equity release products they recommend are suitable for their clients. This regulation provides an added layer of security and transparency in the equity release process.
In addition to the FCA regulation, lenders associated with the Equity Release Council offer additional safeguards to consumers, such as a no-negative equity guarantee and the right to remain in the property for life. This added protection can provide peace of mind to borrowers considering equity release products.
Are there brokers who specialise in unregulated mortgages?
Yes, and seeking advice is crucial when considering a unregulated mortgage. A specialist mortgage advisor can provide expert knowledge, help locate the most suitable mortgage option, and ensure borrowers are aware of the risks to make informed decisions.
This guidance can be invaluable in navigating the complex world of non-regulated mortgages and bridging loans.
In addition to helping borrowers understand the risks, professional advice can also assist in finding the most suitable deal for their needs and guaranteeing that they are making a well-informed decision. This expert guidance can ultimately help mitigate potential risks associated with non-regulated mortgages and ensure a successful property investment experience.
At Teito, our team have helped many people to secure the right finance to take their business forward. Get in touch today and we promise to make the process as stress-free as possible.
Tips for choosing a reputable unregulated lender
When selecting a reliable non-regulated lender, it's crucial to exercise due diligence. Some tips for finding a reputable lender include reviewing customer feedback or complaints and working with a reputable broker.
Additionally, consider looking for professional standards accepted by respected bodies within the bridging industry for unregulated lenders. This can help you gauge the credibility and reliability of the lender, ensuring a smooth and secure property financing experience.
How to get an unregulated mortgage
Non-regulated mortgages and bridging loans can offer flexibility, personalised agreements, and quick access to funds for property investors. However, it's crucial to understand the potential risks and lack of protection associated with these loans.
By seeking professional advice, comparing regulated and non-regulated loans, and choosing a reputable non-regulated lender, borrowers can make informed decisions and navigate the complex world of property financing with confidence.
Remember, property investment is a journey filled with both opportunities and challenges. By arming yourself with knowledge and expert guidance, you can successfully navigate the world of non-regulated mortgages and bridging loans, unlocking the potential for profitable investments and a brighter financial future.
You can take the first steps towards a full application by getting in touch with us to speak to a broker who specialises in unregulated mortgages. They will guide you through the whole process and make sure you find the ideal lender for you.
FAQs
Non-regulated mortgages do not always carry a heightened risk and can provide an excellent financial solution for borrowers. However, these mortgages should be undertaken with caution and research as the lack of FCA regulation could leave you more vulnerable in the event of a dispute.
Therefore, it is important to use due diligence when considering an unregulated mortgage.
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.