Borrowing from family rather than via mortgage

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Norfolk Canary
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Borrowing from family rather than via mortgage

Post by Norfolk Canary »

I have done some research on this and my understanding is that as long as no interest is paid then it is OK to do this as it is a loan and not a gift. It is also advisable to draw up and sign an agreement so that if questions do get asked by the tax man you have proof of the arrangement. I suppose all payments should be made by standing order to further enhance the `paper trail`.
Anybody have any views on this?
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Casscat
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Post by Casscat »

You have to have a loan agreement. Make an appointment with a solicitor for your protection and the protection of the person making the loan. Loans can be interest free and repayable at a pre-determined date or upon demand, but you really, really, really must get things property instituted as there are perils for the unwary.
Norfolk Canary
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Post by Norfolk Canary »

Casscat wrote:You have to have a loan agreement. Make an appointment with a solicitor for your protection and the protection of the person making the loan. Loans can be interest free and repayable at a pre-determined date or upon demand, but you really, really, really must get things property instituted as there are perils for the unwary.
I don't think I would bother with lining a solicitors pockets for this. There are plenty of on line templates for free.
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Casscat
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Post by Casscat »

On your head be it. You'd be a fool to expose yourself to future problems for the want of a couple of hundred quid now. I've seen the kind of problem informal agreements within families and DIY solutions can cause so good luck with that one.
JanB
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Post by JanB »

For many reasons, I would never borrow money from family or friend; in my opinion, it is a recipe for disaster. What if they need the money back in a hurry or you disagree?

Much better to mortgage - rates are low and it is all set out. You have no-one else to answer to.

If you ulitimately decide to borrow from family, then do get a solicitor to draw up an agreement - they are impartial. Tempting to do this on the cheap but that could cost you more than you ever bargained for.

Good luck amd sorry to sound like a doom monger......!
"It's a funny old world...." but full of the most amazing people. :-) Sense of humour essential!
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Cymraes
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Post by Cymraes »

After 30 years spent in financial services I've seen informal arrangements and DIY ones go horribly horribly wrong so another strong recommendation for the solicitor's agreement.

In fact both parties should take separate professional advice especially for the one who is lending the money. There are all sorts of potential tax issues involved which may or may not be an issue depending on personal circumsances.
Zingara
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Post by Zingara »

I can heartily endorse what the other have said...from bitter experience...

Plan A: Don't do it

Plan B: Both parties must have legal advice (which will include 'don't do it'), and a watertight, legally binding agreement, with a charge over the property being purchased. The tax implications are quite involved, too.
AndrewH
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Post by AndrewH »

Zingara wrote:I can heartily endorse what the other have said...from bitter experience...

Plan A: Don't do it

Plan B: Both parties must have legal advice (which will include 'don't do it'), and a watertight, legally binding agreement, with a charge over the property being purchased. The tax implications are quite involved, too.
If the family loan is for a house purchase and is of a substantial amount (like for a deposit), then a Second Charge on the property is IMO an absolute must. The mortgage company (if one is involved) will want the First Charge. They would insist on that in their mortgage offer and it means that they would be paid off first from the sale proceeds when the property is sold. Your Charge would be redeemed next and paid directly to you. Only the balance ("equity") would be at the disposal of your vendor/relative.

With Registered Land this is a painless process. As a lender I think it would be better for you to have your own solicitor deal with the preparation of documents, releasing your funds at the appropriate time, registering your Second Charge, etc. For anyone not in the know, "charge" and "mortgage" mean the same thing for all practical purposes.
AndrewH
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Post by AndrewH »

PS. A mortgage can always be redeemed and the loan repaid earlier than the due date, by agreement.
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