Getting a charge on home to secure/formalize loan to a friend

NKS

I have agreed to take out a loan on behalf of a friend to cover her while setting up a new business - this is for £20k plus with Northern Rock and she'd be paying it back within six months. (she made her own loan applications too early, didn't take them up, then realised her credit rating was affected by the applications anyway so is waiting six months to get a better rate once credit rating improves) I'm happy to make the loan but I realise that 'just in case' we ought to have a legal record of the loan and have me register a charge against her house. Can someone explain what the procedure is and how much protection a charge on her house would give me (vs any other creditors- she's a sole trader) in the event that disaster struck? If it did I *could* afford the repayments but still these numbers make me nervous and I want to make sure we've covered everything properly! Thanks very much

Astaroth

For 20k the agreement should be drawn up by a solicitor. To protect your issues it should be done by your own solicitor not hers (who has a clear interest to write terms to favour their true client). Your solicitor would be the best one to answer these questions - may also want to consider taking life insurance on her too etc (somewhat interestingly even after she does pay off the loan you would be entitled to continue the insurance as you must only have an insurance interest at the time of inception rather than at the time of claiming like all other insurance types)

Bossyboots

You will need a formal legal charge document drawn up. You could do this yourselves, stating the amount loaned and repayment details. You would both need to sign it and have your signatures witnessed by someone independent. Have a look at the Land Registry website for more information. There is a form CH1 which might be what you need and that has to be accompanied by another form which is detailed on the CH1.

You will then need to register the charge with the Land Registry. You will not be a priority charge holder. Your friend's mortgage company will always want first charge. You would be well advised to check how many charges are registered on the property as you will be expected to go last in the pecking order. You need to make sure that the value of the other charges, together with your charge, is a realisable sum should the worst happen and property prices drop.

NKS

Thanks very much for the advice - which raises more questions! The mortgage company is the only other charge against the property as far as I know and there's £40k or so equity so I'm happy on that front - igood pint to check though! If I register a charge now does that then put me No2 in the pecking order in case of disaster? Who could 'queuejump' my charge (builders, landlord..?).
Also, roughly how much is this process likely to cost and is it very timeconsuming to set up? She's concerned about it getting too expensive as it's for a shortish time, but also needs to finalise lease on new business property this week and will pull out if I don't confirm the loan which would be towards building work over next few months. I'm OK to sign agreement to borrow the money now but, however much I trust her, won't release it to her without all the paperwork in place so we need to know roughly what we're letting ourselves in for (I can't find and get to a solicitor to sort details this week, and even then don't want loads of timeconsuming and stressful legalese to deal with - she'd pay but it's awkward enough insisting on this as it is...)

jonesMUFCforever

It's not awkward at all to ask after all it is you risking your money.
I must say that the excuse in post 1 for not taking up her 'loan' is a bit flimsy to say the least. Are you really sure that you want to go ahead?
Any decent bank would have a record of applications and the only way they would refuse the loan a few months down the road is if there was something bad on her credit reports or her running of the accounts does not warrant a loan.
Perhaps you could give some insight into what sort of business this is - have you seen her business plan - is it feasible? According to her own figures will she be able to repay £20k in 6 months??
If you are simply waiting for her to apply for another loan in 6 months and this is her only way of repaying you then this has alarm bells ringing for me.

Obviously you know this person far better than we do and presumably know your own mind but would it not be sensible also for you to have a percentage of her business as a sort of protection which she could purchase back from you at an agreed price of £20k in 6 months.
How much is she putting in?

silvercar

If your the second charge to be registered (mortgage being number 1) then your second in the running order.

The only exception may be if your friend went bankrupt, then different rules may apply and people like the revenue may be entitled to queue jump. If your friend did go bankrupt then there could be the acusation that you as a friend are trying to be a prefferential creditor and that would open a whole can of worms.

Assuming no bankruptcy you would get your money when the property sold, assuming there was sufficent equity after the mortgage was paid. You would not have the power to force a sale unless you drew up a contract that specified this.

You will need to get the permission of the mortgage company (1st charge) to put another charge. The reason is that if there is insufficient equity from a sale to pay the mortgage company and you, you would be entitled to refuse to allow the sale to proceed, leaving the mortgage company with a harder job to be repaid.

jonesMUFCforever

Quote from Silvercar
''You will need to get the permission of the mortgage company (1st charge) to put another charge. The reason is that if there is insufficient equity from a sale to pay the mortgage company and you, you would be entitled to refuse to allow the sale to proceed, leaving the mortgage company with a harder job to be repaid.''

Why would you need permission from 1st charge?
It's there; cannot be amended so any second, third charge etc can only be pot luck because first charge will get whatever is needed to pay off mortgage and whatever is left over goes down the chain.
No way does 2nd charge have the power to stop a sale.

Bossyboots

ejones999 wrote:

No way does 2nd charge have the power to stop a sale.

All they have to do is refuse to sign the paperwork to remove the charge.

silvercar

Say property has value of £100k. Mortgage of £85k. Second charge wanted of £12k.

Say property prices drop by 5%, property now worth £95k. owner needs to sell up, buyer found at £95k. Second charge owner won't get paid in full, so refuses to release charge on property. Buyer won't buy (or his mortgage company and solicitor won't allow it). 1st charge can't get their funds back. 1st charge is effectively held to ransom by 2nd charge, which is why you need their agreement first.

There is a lower level note you can register with Land registry, but I can't remember what it is called. It notes that you are entitled to some of the proceeds of a sale.

specs_3

ejones999
Mad Maverick MoneySaving Maniac

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It's not awkward at all to ask after all it is you risking your money.
I must say that the excuse in post 1 for not taking up her 'loan' is a bit flimsy to say the least. Are you really sure that you want to go ahead?
Any decent bank would have a record of applications and the only way they would refuse the loan a few months down the road is if there was something bad on her credit reports or her running of the accounts does not warrant a loan.

NKS,
please take the above advice, that's the first thing that I thought when I read your first post.

If she was approved for a loan, the company would know that she didn't take up the offer and simply do another check on her credit worthiness. If all they found was a search done by themselves, then they would surely lend her the money?

jonesMUFCforever

silvercar wrote:

Say property has value of £100k. Mortgage of £85k. Second charge wanted of £12k.

Say property prices drop by 5%, property now worth £95k. owner needs to sell up, buyer found at £95k. Second charge owner won't get paid in full, so refuses to release charge on property. Buyer won't buy (or his mortgage company and solicitor won't allow it). 1st charge can't get their funds back. 1st charge is effectively held to ransom by 2nd charge, which is why you need their agreement first.

There is a lower level note you can register with Land registry, but I can't remember what it is called. It notes that you are entitled to some of the proceeds of a sale.

I think we will have to agree to disagree.
The first charge is the first charge.
The only time permissions are wanted if you went back to first mortgage company wanting a further advance.
The 1st charge will then ask the 2 nd charge for permission for their new charge to take precedence over 2nd mortgage - sometimes it is given sometimes not depending on circumstances.