Loans from family and friends – how can they be protected?
I am moving in with my partner and my family is lending me money to help us buy our home – what can I do to ensure that my family are paid back if we split up?
As the average house price increases year on year, it is increasingly difficult for young people to get on the property ladder without some financial assistance from loved ones. It can also be difficult when money is tight and you are just starting out to afford big purchases such as a car to get to work, or pay for the wedding you dreamed of.
Parents and more wealthy family members often help out but it is critical that in the ‘rush of love’ those monies are protected from future claims if you and your partner then split up.
How can you protect monies loaned to you?
Firstly, it is vitally important to distinguish ‘loans’ from ‘gifts’ – the latter are not repayable.
If you are not married and moving in with your partner, one way of protecting large gifts from family and friends may be to enter into a cohabitation agreement setting out the agreements reached between you and your partner about a number of issues, but most particularly in what proportion you own the property, the car etc and what happens if you were to separate at a later date. There is no obligation for couples to own a property in equal shares and so at the very least you should consider reflecting any unmatched contributions to the purchase of a property by altering your respective shares.
However, it may be that your family have simply lent you the money rather than ‘gifted’ to you, and in those circumstances, it is important for those loans to be dealt with in the cohabitation agreement and loan agreements drawn up so it is crystal clear when the monies have to be repaid and how.
If you are married, or later marry, and then separate, it can become slightly more complicated. In any divorce proceedings, both parties need to disclose all liabilities and all too frequently unless there is documentary evidence, it can be difficult to evidence loans from family and friends. When there are a number of competing principles the court needs to deal with when dividing up the available assets, the court will often look at what type of loan it is.
A ‘hard’ loan is something which needs to be paid back within a certain timescale or upon a future but defined event – such as bank loans, or a mortgage. Interest often accumulates.
A ‘soft’ loan is something which has no fixed timescale for repayment if at all and there is no interest accruing. Loans from family members are often classed as soft loans and when there are more pressing demands upon the limited assets available for distribution which are often needed for rehousing the parties and children, such loans will not take priority.
If you are borrowing monies from family or friends you may wish to discuss with them how they can protect those monies and ensure they can be repaid in the event of separation. You should consider drawing up a formal loan agreement, with provision for interest to accrue and terms of repayment – that is a timescale and whether interim repayments should be made. It may also be appropriate to consider registering that agreement if the monies are used to purchase a property, with the Land Registry and securing a legal charge against the property.
If you do require advice and assistance in relation to protecting family loans, then please contact E J Coombs Solicitors on 01245 221 699.
