What are the risks of a loan agreement between friends?

It is an accepted legal presumption that any money paid to a friend should be repaid at some point in the future. To protect the transaction and to ensure you have control over when the loan is repaid from the friend, you should draft an agreement and agree the terms under which the loan is to be repaid. The risk of a loan agreement with friends is if the terms you agree don't enable the lender to call upon the debt when they need the money.

What are the risks of a loan agreement between family?

It is an accepted legal presumption that any money paid from parent to child is a gift and not a loan. To ensure the money is repaid and not treated as a gift, a contract should be drafted. The risk with a loan agreement between family is if the terms you agree don't enable the lender to call upon the debt when they need the money.

Do you need to charge interest on the loan?

You don't have to charge interest and quite often a loan agreement between family there is no interest so only the principle loan amount is repaid.

What is the highest interest that can be charged?

Interest rates of less than 1% above the Bank of England (BoE) base rate can use a simple loan agreement template, however if the interest is more than 1% higher, then the agreement needs additional clauses that are in line with the Consumer Credit Act. Interest rates on late payment of loan repayments can be higher - at up to 4% above BoE base rate. In February 2023 the base rate was 4%, making the highest chargeable interest on a personal loan 5% and the highest rate on a late repayment 8%.

What can you use as security for a loan?

When buying a home, there is really only one type of asset that would be used for security and that is the property itself, although cars or other high value assets could be used.

What happens if there isn't enough money to pay off the first charge mortgage and your loan?

On sale, the first charge is settled before anything else, this is why mortgage lenders ensure their mortgage is a first registered charge to protect their loan. If after the mortgage has been settled, there isn't enough money to settle your loan, then the lender will need to seek settlement for the balance from the borrower through the legal system (solicitor and court fees will apply). Property prices can go down as well as up so make sure the borrower is aware that if there isn't enough money on sale to satisfy the loan in full then they are personally liable for the loan amount.

Can I use a free loan agreement template?

A loan is structured in a very particular way so that either the lender or the borrower can enforce their rights under the agreement within a court of law. The challenge you face with DIY agreements or free loan agreement templates is: It is most likely not compliant with the Consumer Credit Act - BE WARNED - failing to comply could invalidate your loan and make it unenforceable; General templates may not suit your circumstances; Making changes to a template loan agreement could make it unenforceable; You aren't able to seek advice on the agreement. An unenforceable loan will expose the lender to being unable to seek repayment for their debt or be repaid any interest on the debt.

How much does it cost to register a loan at the Land Registry?

There are two costs that need to be considered: Solicitors' legal fees and disbursements; and Land Registration fee Solicitors' legal fees and disbursements If you are registering the loan as part of the conveyancing process to purchase the property, then your solicitor should charge a nominal fee for registering this post completion for you (read more about what happens post completion). If you are registering a loan after the property has been registered, then the solicitor will need to charge a more substantial fee to do so. The fee ranges from £200 to £500 plus VAT depending on the solicitor you use, if there is already a mortgage registered over the title and the overall complexity of the case. The solicitor will also charge £6 for obtaining Official Copies of the Register of Title and ID fees (these vary from £8 up to £30 per person). Land Registration fee If you are registering the loan as part of the conveyancing process to purchase the property, then there is no additional Land Registry fee to pay as the charge is registered at the same time as the new owners of the property. If you are registering a loan after the property has been registered then the a fee will be payable based on the property's price. View the Government's current H M Land Registry charges here.

Loan Agreement between friends and family

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Loan Agreement Between Friends & Family

by:

Andrew Boast

(Last Updated: 27/08/2023)

Created on:

23/09/2021

Read by:

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9 min read

Key Takeaways

A loan agreement is a contract between a lender and a borrower which details the loan amount, the repayment schedule, the interest payable, any overdue fees, and any 'security' - If you are securing the loan against an asset belonging to the borrower.
If you are securing the loan against a property, you'll need to notify your lender and registered the charge on the title at the Land Registry.
A generic loan agreement template is unlikely to be sufficient to protect both parties in the event of any failure to meet your agreed terms.
There are limits to the interest rate which can be charged on a personal loan - if higher, the loan will be classed as a commercial loan, which requires a more complex agreement.
Better to have a Simple Loan Agreement, than having nothing.

Loans between friends and family when buying a home are becoming more and more popular. For those who have read our other article Is it a gift or a loan you'll note that when getting a mortgage you'll need to notify your mortgage lender of any money that you receive that is a loan.

In this article we examine what you should do when getting a loan to help fund a purchase of a property, how you the borrower and the lender can protect their interests, what the lender can do if the borrower stops paying and the costs for registering a restriction at the Land Registry.

Our panel solicitor is able to draft your agreement and offers:

Meeting to discuss what your intentions are and draft a bespoke agreement or use one of our standard loan agreements to keep costs down
Optional registration at the Land Registry

The agreement is legally binding, enforceable at court and a restriction can be registered against the property at the Land Registry.

Do you need financial advice?

You may require support with estate, tax of financial planning in relation to the loan contract. For regulation purposes this advice must be given by a different provider than the solicitor who prepares the document itself. Contact us for an introduction to a hand selected tax advisor.

Why do you need a loan agreement?

Although you can lend money between family and friends without an agreement, the challenge arises when the lender needs their money back, especially if the borrower is refusing or is unable to repay. The other side of the coin, which often goes unconsidered until it becomes a problem, is that the borrower has no written agreement that they can keep the money until a specified date. In this case the lender may try to demand the money back at any moment, placing the borrower in a tight situation which may even result in bankruptcy.

ITV's Judge Rinder coined the phrase "I love paper" in reference to when two parties draft an agreement between each other setting out their understanding of how the money was lent and on what terms it was meant to be repaid. It is interesting to note the number of cases that are lost based on not having appropriate paperwork.

What is included:

Loan amount
Name and address of lender
Name and address of borrower
Name and address of mortgage lender (if applicable)
Relationship between the lender and the borrower
What is the purpose of the loan?
What is the interest rate on the loan? (if applicable)
What are the repayment terms including amounts and frequency of payments?
Is there any security?

If there is more than one lender, they will need separate loan agreements relating to their own share of the loan. However, if the lenders are married or civil partners, one loan agreement may be sufficient, as long as their financial interests are aligned.

Registering the Loan

Most loans are secured against an asset, so if the friend or family member is using the loan to buy a property then the lender can secure a restriction against the property at the Land Registry.

The restriction protects the lender from the borrower selling the property and not paying back the loan..

If you are registering a restriction on a property that has already been purchased then you will need to ask a solicitor to register the loan.

Warning: If you do not register the loan at the Land Registry then the property can be sold without your loan being settled. You can still seek settlement for the loan by the borrower, however you risk not getting your loan repaid in full and further costs in seeking settlement through the legal system (solicitor and court fees).

Once the loan is paid off, the lender will need to complete a DS1 form and submit it to the Land Registry, to remove the charge.

Notify your mortgage lender

If the loan is linked to the purchase of a property where the borrower is using the loan and getting a mortgage, then the borrower must ensure their mortgage lender is aware of the loan. The mortgage lender will decide whether they are prepared to lend the mortgage taking into consideration there is another loan - some mortgage lenders will not allow this, however some do.

Our mortgage brokers can help you with this matter if you don't already have a mortgage broker to help.

Do you need help drafting a loan agreement?

Our panel solicitors can help draft a loan agreement for you, whether you're borrowing or lending money to purchase a property.

Lending money to someone else? £399 INC VAT	Borrowing money from someone else? £399 INC VAT
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Written by: Andrew Boast

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.

Reviewed by: Andrew Boast

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.

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