Loan Agreement

23/09/2017
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 loan agreement at the Land Registry.

Our Legal Advisor is able to draft your loan agreement and offers:

  • Meeting to discuss what your intentions are
  • Drafting of the loan agreement
  • Optional registration at the Land Registry
  • Competitively low fees
  • Independent Legal Advice for loan agreements not drafted by us

Our Legal Advisor will draft a legally binding loan agreement that can be registered at the Land Registry. 

Call us now to discuss further on 0333 344 3234 (local call charges apply).

* Need to complete quickly? We can help at no extra cost

Fixed Fee, No Sale No Fee and Unbeatable Value Solicitors.

 

Do you need a loan agreement?

Although you can lend money between family and friends without a loan agreement, the challenge arises when the lender wants the money to be repaid, especially if the borrower is refusing or is unable to repay.

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.

Parents also need to be careful lending money to their children without a written loan agreement because in law it is a presumption that any money paid from a father to his children is as a gift, not a loan. This means if you don't have a loan agreement, your children could argue the money was a gift and as such they do not need to repay you any money. Read more about Is it a gift, or is it a loan?

What is included within a loan agreement?

The following is what is generally included within a loan agreement:

  • 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?

Registering the Loan Agreement

In most cases where the lender is loaning money to the borrower for the purposes of buying a property (or an interest in land), the security used is the property and as such the loan will need registering as a charge over the property's title at the Land Registry. The reason the lender would want this to happen is so that when the property is sold or transferred, then their loan amount will need to be satisfied prior to the release of any profit from the sale.

If this is the case then the loan agreement should be registered by the solicitor acting on behalf of the borrower during the conveyancing process and registered post completion (read more about registering loans post completion).

If you are registering a loan agreement on a property that has already been completed then you will need to ask a solicitor to register the loan on the borrower's property for you (you can do this yourself, however you may have challenges completing the registration, especially if there is a first charge already registered such as a mortgage).


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).

Inform your mortgage lender

If the loan agreement 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 agreement. 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.

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Do you need financial advice?

You may also require support with estate, tax of financial planning in relation to the loan agreement. This is not included within our document preparation service, however we can introduce you to our qualified professionals for this additional service.

FAQs about Loan Agreements

Do you need to charge interest on the loan?

No and quite often parents who lend their children money do so on the basis that they want to be repaid the loan amount and nothing more. In other cases where the loan is from a non-family member, the interest on the loan amount and the payment terms are included within the loan agreement.

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.

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).

IMPORTANT: 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 agreement 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 loan agreements of the 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 agreement 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 agreement 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 agreement 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 agreement 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 agreement 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 agreement 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 agreement 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.

Do you need help drafting a loan agreement?

Our Legal Advisor is able to draft your loan agreement and offers:

  • Meeting to discuss what your intentions are
  • Drafting of the loan agreement
  • Optional registration at the Land Registry
  • Competitively low fees
  • Independent Legal Advice for loan agreements not drafted by us

Our Legal Advisor will draft a legally binding loan agreement that can be registered at the Land Registry.

Call us now to discuss further on 0333 344 3234 (local call charges apply).

* Need to complete quickly? We can help at no extra cost


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