Borrowing Money From Family To Buy a House
Don't rely on a verbal agreement. Even between relatives, a written agreement is essential to eliminate ambiguity, prevents backtracking, and reassures your mortgage lender that their investment is secure.
When lending money to a family member, the loan agreement doesn't require a large number of clauses. You may even choose a Simple Loan Agreement, which is legally binding and enforceable if the borrower refuses to pay you back. What you choose is dependent on a variety of factors such as family relationship, if interest will be charged, and when the loan will be repaid.
Is it a good idea to borrow money from family?
It depends on your personal situation and relationship. Relationships can change for a variety of reasons; the borrower may face difficulties repaying, the lender may need the money back early, or worse, without a legally sound loan agreement, disagreements can arise over whether it was a loan or a gift in the first place.
If you’re using money from a family loan instead of getting a mortgage from a traditional lender, this counts as a private mortgage from a family member. To protect the borrower and the lender, a written agreement must be in place between family members.
For loans of this size that will be secured against the property, we recommend our solicitor drafted service, from £399 INC VAT.
What are the consequences of lending to family?
The consequences of loans for families can have a lasting impact on personal relationships. They may seem like a cheaper alternative, but there are always potential red flags in loaning money to family.
Getting a mortgage loan from parents, also known as the Bank of Mum and Dad, can also pose a problem if they try and hold the loan over you. Repayment time can be a sticking point in most financial transactions between family members. The written agreement will establish when the money has to be repaid.
We can structure your loan agreement for a fixed fee of £399 INC VAT
What is a regulated mortgage contract?
In some instances, for loans secured on a property, the family loan agreement can be a Regulated Mortgage Contract under The Financial Services and Markets Act 2000.
When borrowing money from family, where the loan is secured over land, and there is a minimum interest rate of 2% or more, then the obligations of the lender are more difficult:
- Using a Consumer Credit Act compliant loan agreement
- Providing the borrower with an annual statement of interest and payment received;
- Notifying the borrower of changes in interest rates or payments due under the contract or of other matters of which the contract requires them to be notified; and
- Taking any necessary steps to collect or recover payments due under the contract from the borrower.
A loan between family members isn’t typically a money-making opportunity. Parents simply want their investment returned from the property sale and to prevent their child's unmarried partner from claiming the funds if the relationship breaks down.
If you are looking to get into an investment opportunity, a robust loan agreement, such as a regulated mortgage contract, is advisable. The borrower may even need independent legal advice regarding the terms of the loan to avoid any disputes in the future.
Can I give my daughter an interest free loan?
There is no minimum interest rate that you need to charge, so yes, you don’t have to charge interest to your daughter. A high interest rate makes a family loan agreement complicated, resulting in the need for regulated loans.
When deciding whether to charge interest, consider inflation. It can affect the value of the money you lent. If you get a family loan with a 10-year repayment plan, the value of the capital repaid will be worth less by the time that term expires. This is an example of why family loans are often written down in a loan contract. The interest applied will also have tax implications.
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How much money can I loan to a family member?
You should only lend as much as you can afford. When it relates to a private mortgage for a family member, the risks increase. Even if it results in uncomfortable conversations, you must protect the loan terms with a legally enforceable agreement to avoid a family rift.
Get a professional to draft the parent-to-child loan agreement to clearly define the terms and conditions of the loan.
Are you lending money to family to buy a house?
We can draft all of your intentions into a loan agreement. You review and confirm the intentions, including one free revision before signing. Our prices start from £399 INC VAT.
Request a free callbackWhen is the loan to be repaid?
In your family loan agreement you can choose to repay by monthly instalments, on a specific date, or on a specific trigger. For example, the sale of the property. Most agreements are repayable on sale or if the terms of the loan agreement are breached.
If the lender wants the money back before the agreed date or trigger, most loan agreements allow for the early repayment of the loan with the cooperation of the borrower.
Mortgage lenders usually won't allow second charge family loans with monthly repayments. If there’s no mortgage, you can opt for monthly repayment but both parties will need to consider what is reasonably affordable.
Will the mortgage lender allow it?
If the borrower is also getting a first-charge mortgage, then that lender must agree to the loan. Some mortgage lenders won't agree to additional funding from a loan agreement between family members. Lenders typically prefer you to pay the deposit out of your own pocket, decreasing the liability.
It's a different story entirely if the money for the deposit was a gift, but as it's a loan agreement, there is money for you to pay back to both the lender and your parents.
You should speak to your mortgage lender and see if they will agree to offer you a mortgage if you are also securing funds through a loan agreement between family members. Our mortgage brokers are fully impartial and have access to the whole of the market, if you need help finding a lender who will accept a second charge.
Do I have to pay tax if I borrow money from family?***
Interest
Income tax is payable at the prevailing rate on interest on peer to peer loans.
Inheritance Tax
Inheritance tax shouldn't be ignored when assessing the tax implications for a loan to family. From an IHT perspective, if the loan is repayable on demand, then the value of the lender’s estate is exactly the same before and after the loan is made and prevents the loan from being treated as a ‘transfer of value’ which may be subject to IHT.
The asset's value when assessing IHT remains the same as the original loan. Any increase in the debt, such as income or penalties, falls outside of the deceased lender's estate.
- Get up-to-date property tax advice on SDLT, CGT, IHT, personal vs partnership vs company structure.
- Free 15-minute initial consultation with our panel tax advisor.
- Ask your tax questions and get guidance on what you can do next.
- If further accountancy work is required, you'll be quoted for this as a separate piece of work with no obligation to purchase.
| Lending money from family? £399 INC VAT | Borrowing money from family? £399 INC VAT |
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
