Lending a family member funds to purchase a property
One option to assist a family member in purchasing a property is to provide them with a loan. You may have concerns about how this would work in practice and what security you would have. Here are some steps that you can take to document and protect that loan.
Documenting the loan
The loan itself is usually documented in a loan agreement which can be drawn up by a solicitor. This agreement is tailored to individual circumstances and covers the following points:
- The amount of the loan (if you are providing the full amount of the purchase price, ensure the loan amount includes any disbursements relating to the purchase of the property i.e. Stamp Duty Land Tax, Land Registry fees, legal fees).
- Whether interest is payable and, if so, at what rate.
- Repayment of the loan – this might be in monthly instalments, or perhaps when the property is sold at a future date. If the latter, you could include a provision that requires the loan to be repaid by a certain date (i.e. three years from the date of the loan agreement). This means the loan has to be repaid by this date, otherwise the borrower will be in default and you can exercise your rights under the agreement.
- Usually loan agreements include the means by which the lender can enforce their rights against the property if the borrower does not comply with the terms of the loan agreement (i.e. default interest on unpaid sums and can even go as far as the right to sell the property).
Property as security
Satisfactory due diligence should be carried out on the property to ensure that it is good security against the loan. This will include all of the normal investigations that would be carried out when purchasing a property including title investigations, searches, valuations etc. This will give you peace of mind that your loan can be secured against the property.
Protect the loan
The loan should be registered at the Land Registry as a first legal charge over the property. You can also request that a restriction is inserted on the title of the property. This alerts any potential buyer of the existence of the debt and therefore makes it very unlikely that the property will be sold without the loan being repaid.
A legal charge will only be removed from the Land Registry (together with any restriction) when the loan has been repaid in full and the Land Registry has seen evidence to that effect.
Lending part of purchase funds
If you are planning on lending part of the purchase funds and not the full amount, you should be aware that your loan would need to be declared to a mortgage lender if one is involved in the purchase. Mortgage lenders are somewhat reluctant when there is someone else involved who has an interest in the property. It can also affect mortgage affordability as some lenders will include the loan repayments into the individual’s outgoings and therefore the mortgage offer will most likely be lower.
For general advice in relation to any commercial property matters, including legal charges, please contact Samantha Mabbutt on 01635 917499 or fill in the enquiry form.