Loan Agreement Between Friends & Family
(Last Updated: 10/12/2024)
23/09/2021
79
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.
Some personal loans may be also be covered by the consumer credit agreement, which offers extra relief to the borrower, leaving the lender vulnerable.
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, for £399 INC VAT, whether you're borrowing or lending money to purchase a property.
Lending money to someone else? | Borrowing money from someone else? |
Frequently Asked Questions
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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.
