Friend to Friend Loan - Needed in Writing for a Mortgage

Zelfer

Clive_Woody wrote: »

Unless I am missing something where is the fraud? Who is being misled here? What do you feel is illegal about borrowing money from a friend?

The mortgage company appears to be okay with this and the OP states that it has been clearly explained to them and they were the ones requesting the letter. All parties are aware of the situation and seem to be comfortable with the arrangement.

I know that normally people on here state that mortgage lenders will not accept a loan as a deposit but in this case the financial arrangements are such that there is a large amount of equity in the property based on the mortgage (which would be secured on the property) as well as a large deposit with any subsequent loans unsecured and therefore down the pecking order if the OP did default.

Thanks for putting that together, I was having difficulty putting it with such succinctness. This is exactly what i was trying to get across.

da_rule

bigadaj wrote: »

Still potentially fraudulent and illegal.

I don't think so. If the OP was lying in any way then there may be fraud but as long as the friend exists, the money exists and the friends is going to give the OP the money there is no fraud. And in terms of illegal, the only law that the OP needs to be wary of is if the friend is thinking of charging interest, as there are laws on who can make a profit from loaning money (i.e. Institutional lenders). The OP also needs to have some thought to what would happen if he died or if the friend died as the debt could become instantly payable.

In terms of the will, your solicitor should be able to draft a simple codicil which amends the will or adds a provision, rather than drawing up a new will. The codicil can then be cancelled once the debt is paid.

bigadaj

Clive_Woody wrote: »

Unless I am missing something where is the fraud? Who is being misled here? What do you feel is illegal about borrowing money from a friend?

The mortgage company appears to be okay with this and the OP states that it has been clearly explained to them and they were the ones requesting the letter. All parties are aware of the situation and seem to be comfortable with the arrangement.

I know that normally people on here state that mortgage lenders will not accept a loan as a deposit but in this case the financial arrangements are such that there is a large amount of equity in the property based on the mortgage (which would be secured on the property) as well as a large deposit with any subsequent loans unsecured and therefore down the pecking order if the OP did default.

Because it is contingent and connected to the purchase.

There is plenty of equity in the property but this loan is needed for the purchase. The obvious option is to arrange for a loan that is appropriate for the actual amount being borrowed, however this would cost the OP money and apparently stretch them beyond affordability criteria.

There's no reason why the OP can't arrange things as previously stated, by a note in the will, or life insurance. The other option is a simple letter, witnessed and agreed, but this would confirm it is an unsecured loan, it can't be secured on the property for the reasons discussed.

da_rule

bigadaj wrote: »

Because it is contingent and connected to the purchase.

There is plenty of equity in the property but this loan is needed for the purchase. The obvious option is to arrange for a loan that is appropriate for the actual amount being borrowed, however this would cost the OP money and apparently stretch them beyond affordability criteria.

There's no reason why the OP can't arrange things as previously stated, by a note in the will, or life insurance. The other option is a simple letter, witnessed and agreed, but this would confirm it is an unsecured loan, it can't be secured on the property for the reasons discussed.

The OP has never mentioned making it a secured loan. There are also no other grounds to make it unlawful. All of the parties (the mortgage company, the friend and the OP) are all aware of what is going on and have all consented to it. Also, the fact that it is contingent and connected to the purchase makes no difference. A mortgage is contingent and connected to the purchase and is legal. There are many situations where loans are connected to purchases. In fact very few people get loans just because they want to roll around in the money it is usually to finance something, usually some sort of purchase.

Zelfer

bigadaj wrote: »

Because it is contingent and connected to the purchase.

Hi.

Why does this line specifically make it illegal? If i don't continue with the purchase of the property, i won't take the loan out. If we sell the house, I want to release the funds back to the friend. This is common sense to me, so i don't understand why this makes it illegal.

I haven't gone to a "standard" loan company, on the basis that they would want full term repayments from month 1, and the interest rate would be untenable, which as you say, for affordability criteria i can't do.

Thanks!

da_rule

It doesn't. If you were deceiving the lender in any way then yes. As long as the lender is aware that the extra money is by way of another loan and they are happy that it is from a friend then there is no problem. The only thing I will ask is have they asked how you will repay the loan? Just thinking about affordability.

Zelfer

da_rule wrote: »

It doesn't. If you were deceiving the lender in any way then yes. As long as the lender is aware that the extra money is by way of another loan and they are happy that it is from a friend then there is no problem. The only thing I will ask is have they asked how you will repay the loan? Just thinking about affordability.

They have. The loan will be paid back at the same rate as if it were part of the mortage for 2 years ( ie no change to our original finance calcs) until we clear our car loan, and then pay the rest off in monthly installments at the car loan rate.

We also currently have about 3k in savings/stock ( 2 months outgoings) sat aside in a highish rate ISA that we don't want to touch if possible so that i have some protection if the worst happens. If the loan is recalled at any point ( as a friend i want to be able to offer this) , we can therefore get 90% of it back quickly, and probably a "standard" loan for the rest if we've not saved up a bit more money by then.

Clive_Woody

bigadaj wrote: »

Because it is contingent and connected to the purchase.

There is plenty of equity in the property but this loan is needed for the purchase. The obvious option is to arrange for a loan that is appropriate for the actual amount being borrowed, however this would cost the OP money and apparently stretch them beyond affordability criteria.

There's no reason why the OP can't arrange things as previously stated, by a note in the will, or life insurance. The other option is a simple letter, witnessed and agreed, but this would confirm it is an unsecured loan, it can't be secured on the property for the reasons discussed.

Still no fraud or illegality as far as I can see.

The mortgage lender is not prepared to offer the full amount needed for the house purchase. The OP has access to other funds to cover the shortfall. The mortgage lender is aware of the source of these funds and has expressed no concerns about this.

The friend lending the money is fully aware of what the money is for and also has no issues with either lending the money nor with it being considered an unsecured loan.

If the loan from the friend was confirmed in writing (ideally by a solicitor) then in the unfortunate circumstances that the OP died the friend could make a claim against her estate but obviously would rank behind secured loans in terms of being paid.

All seems perfectly legit to me (albeit with no legal training).

da_rule

There we go then. Sounds like it's sorted. So am I right in saying that it wasn't the value of the increased loan that made it 'unaffordable' it was all the fees that came with adjusting the loan? Therefore as this loan from a friend doesn't include any fees you can pass the affordability test.

Zelfer

da_rule wrote: »

There we go then. Sounds like it's sorted. So am I right in saying that it wasn't the value of the increased loan that made it 'unaffordable' it was all the fees that came with adjusting the loan? Therefore as this loan from a friend doesn't include any fees you can pass the affordability test.

Aye, that's exactly it. Since we applied for the mortgage, the offered interest rate has been pulled, and we paid a reasonably large fee for good 2.75% 5 year fix, ( being so close to a safe affordability margin we wanted some protection until the wife can return to work) so we trying to do everthing by the book. If we had to re-negotaite, the new fees would remove more from our deposit, and then still cost more per month, so we couldn't afford to go there.

I was beginning to get the impression that trying to cover my friend and mine behind was actually wrong, and i really didn't want to pull our savings out, only to then have a loan from a friend to re-populate them for us.

So - steps going forward:
1) Get a letter signed by both friend and I agreeing terms, just saying it's unsecured and will be paid back in 4 years time, witnessed by someone.
2) Get a codicil from solicitotr affecting change in will.to cover friend.

Thanks!