Understanding what is regulated and what is not in the development finance can be sometimes be a little tricky.
Typically, the rule is:
- Any residential development finance is regulated
- Any commercial development finance in unregulated
When borrowing against a residential property (such as a flat or home), the FCA enforces various rules and regulations to protect consumers, especially if the property is their primary form of residence and ultimately they want to avoid the borrower losing their home and finding themselves on the street.
As a rule, any development finance applications become regulated if 40% or more of the property is used as a residence or dwelling. Examples include buying a plot of land in order to build a new home or if you are building a property in the garden of the customer’s home.
As a consumer or borrower, you know that you have protection in place with your lender should something go wrong – although the application process is usually a lot more thorough. For any mortgage brokers and consumer credit providers, senior managers must be approved by SMCR (Senior Managers and Compliance Regime) to ensure accountability and responsibility for any decisions, risks and action taken.
Regulated activity includes:
First charge – As a first charge mortgage which is the individuals main mortgage and the first thing that is ‘charged’ each month from their bank account.
Second charge – This is a second mortgage on an existing home or different property – it is second in the list of priorities to be paid, hence it is the ‘second thing that is charged’ from your bank account. You can typically borrow less than the first charge mortgage, because the lender is now a second priority – so if you struggle to keep up with payments, your first charge is paid first, and then your second.
With more than half of development finance deals being unregulated, they are used for commercial properties including:
- Business purposes
Being unregulated, the FCA has no protection or supervision in this area. There are of course regulatory guidelines for lenders and brokers such as the Mortgage Credit Directive and other rules that lenders must adhere to.
Loans are typically by way of second charge or they are formed as loans for limited companies, rather than individuals.
The amount you can borrow through unregulated activity is usually higher than with regulated and they are able to take a view on adverse credit histories – which may suit some businesses and developers more so.