Loan Agreement Between Friends & Family

Data from Legal and General and the Centre for Economics and Business Research shows that the 'Bank of Mum and Dad' is a huge driver of the property market, funding over 335,000 property purchases in 2024 alone.

While these loans are often made with the best intentions, a simple verbal agreement can lead to serious misunderstandings, damaged relationships, and financial loss.

A formal, written loan agreement is a straightforward legal document that protects both the lender and the borrower by clearly outlining the terms of the loan.

It provides a clear point of reference should a disagreement arise, which is particularly important in situations like a divorce or a death.

• A loan agreement is a legal contract that formalises a loan between a lender and a borrower, protecting both parties and detailing the loan amount, repayment schedule, and payable interest.
• The "Bank of Mum and Dad" funded 42% of property purchases for under-55s in 2024. This highlights the importance of having a clear personal loan agreement.
• If you are securing a private loan against a property, you'll need to notify your lender and register the charge on the title at the Land Registry . This prevents the borrower from selling without repaying the loan.
• While a Simple Loan Agreement can be a good starting point, a bespoke document is often necessary to ensure the loan is legally sound and enforceable, particularly in the event of a default or divorce.
• 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.

What is a Loan Agreement, and why is it essential?

A loan agreement is a legally binding contract that formalises a financial arrangement between a lender and a borrower. Unlike a gift, a loan agreement for a property purchase clearly states that the money is to be repaid.

While verbal agreements are technically enforceable in England and Wales, the challenge lies in proving the agreed-upon terms if a dispute arises.

In court, informal loans may be treated as "soft loans", which can leave the lender's money unprotected, particularly in a divorce settlement. Using a formal personal loan agreement ensures the debt is recognised as a legally enforceable liability.

Do I need to notify my mortgage lender?

Yes. If the borrower is getting a mortgage, the mortgage lender must be notified of any private loan, including a family loan agreement.

This is a critical step because some lenders will not allow an additional loan, while others will want to see the formal loan agreement to ensure the borrower can afford the repayments. Our mortgage broker can help you with this matter if you don't already have one to help.

Protect the loan with a registered restriction

Most loans are secured against an asset. If you are lending money for a property purchase, you can secure a restriction against the property's title at the Land Registry.

This restriction protects you, the lender, from the borrower selling the property without paying back the loan. It ensures that the loan is settled when the property is sold.

If you are registering a restriction on a property that has already been purchased, you will need to ask a solicitor to assist.

What to include in your Loan Agreement

To ensure your loan agreement is comprehensive and legally robust, it should include the following key details:

• Loan amount, interest rate, and repayment terms (including dates and frequency).
• The full names and addresses of both the lender and the borrower.
• Details of the property and mortgage (if applicable).
• The purpose of the loan (i.e. to fund a property purchase).
• Any security for the loan (e.g. a charge on the property).

The dangers of a generic loan agreement template

It is important to note that a generic loan agreement template is unlikely to be sufficient to protect both parties.

A simple template may fail to account for unique circumstances, could inadvertently fall foul of consumer credit regulations, and may not provide the necessary security.

For this reason, a bespoke agreement drafted by a professional solicitor is highly recommended.

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.

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

Two costs need to be considered:

• Solicitors' legal fees and disbursements.
• HM Land Registry fees.

Solicitors' legal fees and disbursements

If you are registering the loan as part of the initial property purchase and conveyancing process, your solicitor should only charge a nominal fee for this work.

This is because they are already handling the Land Registry application for the new owner, and the restriction is simply an additional task.

However, if you are registering a loan on a property that has already been purchased and registered, the solicitor's fee will be more substantial. This is because they have to undertake a separate piece of legal work.

The cost for this service typically ranges from £200 to £500 plus VAT, depending on the complexity of the case and whether there is an existing mortgage on the property.

The solicitor will also pass on the cost of essential disbursements, such as obtaining Official Copies of the Title Register and completing ID checks.

HM Land Registry fees

If the loan is registered as part of the initial conveyancing process, there is no additional HM Land Registry fee to pay. The charge is included within the primary registration fee for the property transfer.

If you are registering a loan on a property that has already been registered, a fee will be payable. This is a fixed fee of £20 per title when applying electronically, or £40 per title for postal applications.

The fee is for the application to register a standard restriction, which is the mechanism used to protect your loan.

You should always refer to the government's official guidance for the most up-to-date HM Land Registry charges.