Should a loan to a family member be secured?

May 13, 2020

In these challenging times, it is not unusual for a person to require some financial assistance from a family member in order to purchase a property. Many first time buyers receive help from the bank of mum and dad in order to get onto the property ladder. There may also be other circumstances, such as in a divorce situation, when a loan is offered from a family member to assist with a property purchase.

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 consider whether they wish the loan to be secured. Usually, this would be by way of a mortgage over the property being purchased using the loan. Security gives the lender more options if the borrower defaults on the loan, and in certain circumstances of default, a mortgage would usually allow the lender to step in and sell the property if necessary. Security will give greater comfort to the lender that they will recoup their loan in the future.

However, there can be issues with a secured loan. 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.

If you are considering securing a loan to a family member, and would like assistance with the preparation of a legal mortgage, please contact our Real Estate department or email your query to realestate@herrington-carmichael.com; call us on 01276 686222 or visit our website https://www.herrington-carmichael.com/contact/

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.

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