Legal considerations of the “Bank of Mum and Dad” and other family loans

More and more first-time home buyers are now relying on family members to help them get onto the property ladder and loans from family members are becoming the norm. This if reflected by the fact that the “bank of mum and dad” is now said to be one of the 10^th largest lenders in the UK.

Increasing house prices, difficulties with saving and bad credit ratings are just a few reasons why, for some, loans from family members are the only realistic option when it comes to buying their first home.

What should be considered before handing over the cash?

The first question is often whether the money being offered is a gift that might be used as part of inheritance tax planning or whether it will be a loan that the lender expects to be repaid.

If it is a loan, the parties should consider when and how this is going to be repaid and whether interest is going to be charged. This is often mutually agreed between family members but, understandably, parents or whoever else is proving the loan, may want some security to ensure that they are repaid in full.

How can I make sure that I have the best chance of being repaid?

Loans can be secured by taking a legal charge over the property being purchased in the same way that a high street lender would when a mortgage has been agreed. This would allow a lender to recover the balance of their loan when the property is subsequently sold before it is used to pay any other debts and may allow the lender to retain some control over the property. It would also give them powers of enforcement should the borrower not stick to the loan agreement and it would give them the ability to force a sale of the property as a last resort.

Are there any other family situations that this might apply to and are there any other considerations that I should think about?

Inter-family loans are not exclusive to first-time home buyers from parents or other family members, they can be for any reason such as to help keep them or their small business afloat during the Covid-19 lockdown crisis. If the borrower already owns their own home, then this can be used as security for any inter-family loan. If there is however already a mortgage over the property, then you will need to get the consent of your existing lender.

Increasing numbers of people are now lending money to elderly relatives who are looking to downsize. People are rightly concerned that they may eventually need to go into a care home and their assets, including property, may need to be sold to cover the cost of care home fees. If however part of the purchase price was borrowed from a family member who has protected their contribution with a charge over the property, then they will get this back when the property is sold by the care home.

How we can help?

If you are looking to make a loan to a family member and would like to protect the loan by documenting it with a suitable loan agreement or securing it with a legal charge or if you would like any further advice in connection with this then please contact us on 01623468468 or use the enquiry form below. We are always happy to have an initial friendly chat.