The up and coming generations are struggling to get on the property ladder without some outside help. Banks are tied up in red tape and the youngsters are turning to their favourite parent, aunt, uncle, grandma or grandpa to give them the step-ladder with some family funding.
We have acted for numerous clients lending to their young family members to help them in buying apartments and houses. Our aim is to protect your lending as though an investment. We make sure you are not caught up in the red tape by falling within the consumer credit exemptions and ensure there is sufficient security for you whilst still maintaining the family relationship.
These cases regularly involve difficult questions involving family relationships, we have set out the main considerations below:
For you, this is a family loan. Therefore, you are unlikely to be in the habit of lending money for the purposes of the Financial Conduct Authority. However, the exemptions are limited and we need to ensure that you fall into one of them. In many cases the loans are interest free and therefore, with a few further obligations and rules, can qualify for an exemption under consumer credit laws.
Exemptions to Consumer Credit
To achieve an agreement that falls within the consumer credit exemptions you have to be aware of the type of lending arrangement you are entering into. For example whether it has a restricted use and whether there is a third party purpose. The repayment terms and charges can make the difference between complying and falling foul of an exemption. There are separate rules for lending for the purposes of land and security over land.
We have set out a brief summary of the main exemptions, please see our Agreements for loans page.
If you are lending to a limited liability company, the consumer credit rules do not apply. However you may wish to request a personal guarantee, please see our page on personal guarantees.
The Financial Conduct Authority govern all lending to an individual. If you do not fall under an exemption, you have to be authorised or regulated by the Financial Conduct Authority, which can be a lengthy and complicated process.
Even in a close relationship, we need to ensure that your interests are protected. We achieve this using our experience to provide protection in two layers:
Private lending relationships often forego representations and warranties, which are promises that certain facts are true at the start of the lending relationship. This is because everyone trusts each other. However, these promises become far more important when you are lending to a family member. This is especially if you are lending to their partner as relationships break down often quicker than repayment.
You want to ensure that all parties are fully informed before lending/borrowing. So if the relationship breaks down there isn’t an argument over what was intended.
What happens if they break the rules?
Events of default and negative covenants are the “don’ts” for the borrower. They are by nature heavily one-sided in your favour to contractually protect against the risk of lending the money. They are drafted to contractually protect you from, for example, additional borrowing or security by the borrowers and in the event of bankruptcy or other insolvency event to declare the loan as due and payable.
It is important to be protected against the relationship breakdowns and failures to repay in the future. This is whilst ensuring that the family relationship is not strained by the process. We understand the delicate balance in the relationship and carefully negotiate protections that everyone feels comfortable with. It is better to put these mechanisms in place so that everyone is clear on how the money is to be dealt with in various circumstances.
The most common form of Security is a charge against the property in your favour, there are, however, options for alternative lending, if a charge is not appropriate.
Double checking the figures
With no Bank or mortgage, there is no valuation to confirm the price of the house. Therefore, there is no way of knowing if the parties are making a good investment (whether it be intended to eventually be a gift or repaid). If you are not certain that there is enough equity in the property for your family funding, you can get a formal valuation carried out.
Usually lending requires monthly repayments with interest and default interest for late payment. These charges can quickly escalate for a borrower. Consumer credit rules have put restrictions in private lending scenarios to stop excessive charges being levied on borrowers, family funding tends to be more forgiving than the Bank but will often want repayment with a small return.
In many circumstances, you will want to treat the lending as an investment to help your son, daughter, niece, nephew or grandchildren get on the property ladder and get a return upon sale. To achieve this within the consumer credit rules, it involves careful planning and drafting. We ensure everyone can achieve what is needed whilst still falling in the lines of consumer credit exemptions.
The most common exemption is the ‘interest exemption’, which caps how much interest can be charged under a loan. If you are relying on the interest exemption, all charges will be counted for the purposes of the limit. This means all the charges levied under the loan agreement must be equal to or under the limit imposed.
Where interest under the loan agreement is the maximum permitted under consumer regulation, any additional charges will fall foul of that exemption. This includes default interest, inflation, profit or growth awards (whether upon sale or otherwise).