Loans from family or friends for a purchase of a property

A friend lent money to another friend to buy a home as the friend did not have enough equity to obtain the level of borrowings from a bank that they wanted.  The friends had understood it would be interest free and the loan would only be called up if the home was sold, however they had not documented anything in writing so had no proof of what was agreed.

Unfortunately the friends fell out and the friend who had lent the money demanded repayment of the loan, together with interest.  The friend who had received the loan had to hurriedly borrow money from a second tier lender in order to avoid dealing with the costs and stress of Court proceedings regarding the loan.

It is becoming quite common for family and friends to help with the purchase of a home by offering loans.

One way this is done is by the person lending funds to assist with the purchase of a property (called a “private loan”).

It is very important for both parties to agree in writing what the arrangement is, especially for the purchasers relying of those funds to purchase the property.

If the arrangement is not recorded in writing and signed, there can be arguments later as to what the arrangement was between the parties.  This is made even more difficult if one of the parties dies or loses capacity.

Private loan where there is no main bank taking a mortgage over the property already

In this circumstance, the private loan can be recorded in documents such as a term loan agreement, deed of loan or deed of acknowledgement of debt.

The document should record:

1. The loan amount;
2. Is any interest being charged;
3. Whether penalty interest be charged by the lender;
4. When and how the loan will be repaid;
5. Whether any events (such as a sale or death) will trigger repayment; and
6. Whether any security (such as a mortgage or a caveat over the property in favour of the lender) is being given.

Private loan where there is a main bank involved

If the purchasers are getting a loan from a main bank as well as a private loan, then the private loan arrangement would need to be approved by the main bank before the bank will approve finance for the purchaser.

The usual requirements by the main banks for a private loan are that:

1. The private loan cannot be repaid until the main bank’s loan has been paid in full; and
2. The loan be interest free.

The main bank will usually not consent to any security interest, such as a mortgage or caveat, being registered for the private loan.  If a main bank does consent to the any security interest being granted for the private loan, it is usually on the basis that the private lender agrees to not interfere with the main bank’s rights in respect of their security interests and the private lender cannot exercise their rights until the main bank has been repaid in full.  The main bank would rank first and the bank would likely require a Deed of Priority to sign.

Entering into a loan is major transaction and it is vital to take legal advice to ensure it is properly recorded.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.