how do I protet myself if I lend money

xylophone

There is enough equity in the property for the debt, I can put a charge on the house,

Presumably a second charge as there is already a first charge on the property?

The first charge holder has "first dibs".....

grey_gym_sock

ok, let's suppose you have a second charge set up properly (by a solicitor).

what happens if your relative keeps up payments on their first mortgage, but decides they have higher priorities than paying back anything to you? after all, you have security on the house, so you aren't really losing out, they will reason. and clearly you have no immediate need for the money, or you wouldn't have lent it to them in the first place.

in that event, you are protected, in the sense that, after your relative has failed to make the payments that are due to you for a significant time, then you can go to court to get the house repossessed, which will probably get you all your money back.

are you prepared to do that? i.e. take your relative to court, and repossess their house?

if you are prepared to repossess, that will be incredibly stressful, and almost certainly destroy your relationship with your relative.

if you're not prepared to repossess, your relative could easily keep postponing repayment indefinitely. you might think you can be reasonable by showing forbearance for a year, or 2 years, or whatever. but at some point, either you have to be prepared to repossess the house, or you're in danger of getting fobbed off for ever. there's no good middle way here.

the alternative to repossession is to wait until your relative dies (assuming they die before you), at which point the house can be sold. there might then be enough value in the house to pay you off in full, though this is much less certain than with a relatively early repossession. because you would have years - perhaps decades - of interest rolled up, increasing the size of the loan, and house prices might or might not keep up with that rate of increase in the long term.

some other points ...

if you do this, you must make sure that you can make the payments on the loan you are taking out yourself, even if your relative isn't making payments to you on time. otherwise, you'd be taking a serious risk with your own finances.

and the interest rate you charge your relative should really not be the same as the rate you are being charged to raise the money, but higher. partly because the interest you receive will be taxable, while the interest you're paying won't be tax-deductible - so you'd actually lose out if you don't charge more. also because you may not be paid on time, i.e. you're taking on some risk. also, your relative should be paying a higher rate of interest for a second charge than they are on their first mortgage - that is only reasonable (and it might even encourage them to be more serious about paying you back).

but basically, don't do this unless your happy to pay back the loan you take out yourself with no help from your relative, and then to wait decades to be paid back, perhaps in full, perhaps not.

MEM62

Trishy_M wrote: »

Thanks for advice, its what I would say to someone else. I have been ringing around and just to finish the thread if someone looks in future this is what I found to help with decision making.
I have spoken to a solicitor (not all solicitors can do it so ask around):- There is enough equity in the property for the debt, I can put a charge on the house, the same as any other lender, to either pay the outstanding debt if it is sold or to force a sale if payments aren't made. The solicitor would draw up an agreement and pay the loan company directly. Cost is £500-600.

And you are prepared to sell the house from under you relative when you cannot recover you money, are you? I am not so sure.

I'll look out for your next post in a year or so. 'Lent my relative money and cannot force house sale to recover it.'

Bravepants

My partner's brother still owes her £5000 from a few years back. He's got a number of businesses and drives a big shiny Jaguar 4 by 4, but his ex-wife shafted him for most of his dosh, after SHE spent nearly £100,000 of inheritance from her mother on trash! Even if they get the money doesn't mean they will payback...familiarity breeds contempt.

Also, my sister-in-law once asked me to be guarantor for a £4000 online loan for a small business she wanted to start, she said all I had to do was click a link and agree. Luckily the link showed me that the interest rate was 49.9%, meaning that it would turn into owing £8000. I pointed it out to her and she was suddenly like, "Oh it's OK, I got the money from somewhere else!" She started the business anyway, she did well for about 1 month before she realised she couldn't cope with the hard work and she quit it. Luckily I wasn't stuck with the payments!