As the cost-of-living crisis continues and increased mortgage rates thrive, it is not unusual for an individual to require some financial assistance from a family member in order to purchase a property.
Why a secured loan?
When lending money, it is common practice for a lender to secure their loan against assets of the borrower, which then act as collateral if the loan cannot be repaid. A common example of this is securing money against a property by means of a mortgage. Accordingly, whether it be first time buyers getting onto the property ladder with help from the bank of mum and dad, or family members assisting with the purchase of a property following a divorce- a secured loan should always be considered.
What are the first steps to consider with loans to family members?
Before any payment is made, the parties should consider the terms on which the loan is to be made. This would include, for example, the duration of the loan, when and how repayments are to be made, whether any interest is to be paid and what would happen if the borrower defaulted on the loan. The lender should also then consider whether they wish for the loan to be secured. As above, this would usually be by way of a mortgage over the property being purchased using the loan.
What are the advantages of a secured loan?
Having a written agreement allows both the lender and borrower to have a clear understanding and full awareness of the terms of repayment. A secured loan also enables personal relationships and financial responsibilities to be separated, possibly preventing disputes that may arise. Furthermore, security gives the lender greater options if the borrower defaulted on the loan, and in certain circumstances of default, a mortgage may allow the lender to step in and sell the property if necessary. As such, security will give greater comfort and certainty to the lender that they will be able to recoup their loan in the future.
Are there any issues associated with secured loans?
There can be issues with secured loans. The borrower may already be obtaining a secured loan from a commercial lender and so the commercial lender’s permission would be required. Any mortgage to the family lender is likely to be subject to the commercial lender’s mortgage. In addition, in certain circumstances, the secured loan may fall within the regulated mortgage regime. This is a complex regime, which should be considered before the secured loan is completed.
What can we do to help?
If you are considering securing a loan to a family member or even a friend, and would like assistance with the preparation of a legal mortgage, please contact us to speak to a member of our Real Estate team.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
