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I live in the UK. Specifically, how do I draft a loan agreement that provides basic safeguards for borrower and lender (very basic safeguards, as we're talking about an intra-family loan and the level of trust is very high), and also satisfies tax requirements so that it doesn't look like the lender is gifting the principal at a non-commercial rate.

The Virgin Money Family Mortgage mentioned on this page appears ideal, but about.com appears to be US-centric and I can find no evidence that Virgin Money actually offers such a product.

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    Don't know about UK laws, but I would recommend against loaning money to family. It has a tendency to go badly
    – Kevin
    Commented Apr 26, 2013 at 14:58
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    A mortgage is different from a private loan agreement in which money is simply lent without any surety or collateral. Which one are you interested in? Will you be willing to foreclose on the trusted family member's property if he/she does not keep up the payments? If not, all you need is a loan agreement: no need to go through a mortgage.
    – Dilip Sarwate
    Commented Apr 26, 2013 at 15:06
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    Get a solicitor, you don't want HMRC having a look. Don't take advice from here. Should be charged around £500-600 to draw up an agreement, maybe less also.
    – DumbCoder
    Commented Apr 26, 2013 at 15:26
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    @DilipSarwate While I agree that drafting mortgage contract language is more a question of law, I think there's a good answer to this question that in essence is "don't draft it yourself - hire a professional" and states the reasons why, e.g. pitfalls of trying to do this yourself. Simply closing this question as off-topic (and it getting deleted, which is what happens with off-topic questions, eventually) won't make the internet a better place, whereas a good post describing why one should use a professional for such matters will help others who come asking/searching about the same thing.
    – Chris W. Rea
    Commented Apr 26, 2013 at 18:40
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    I do imagine exactly this kind of question coming up again in the future. If the question were much narrower, there would be less value in a canonical answer, but I see some here.
    – Chris W. Rea
    Commented Apr 26, 2013 at 18:41

2 Answers 2

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Talk to a good tax accountant in the UK who deals with this sort of thing, as it sounds like most of the issues concern local tax.

You actually have at least four different ways to do this transaction:

  • mortgage secured by the property
  • personal unsecured loan
  • Buy it, then lease to "borrower" with option to buy for various prices after 5,10,20,30 years
  • cosign a loan for the family member at a bank where your credit is good or you have funds on deposit

You definitely need good local tax and legal advice.

No matter how you do it, if the borrower defaults, it will be socially ugly and will involve some kind of collection or legal action if you want your money back. If it were me, I think I'd choose the lease with option to buy. At least that way you may be able to inspect the property from time to time, make sure it is kept up, and be able to get it back through eviction rather than foreclosure.

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Definitely consult a lawyer.

Mortgages are highly regulated now, and regardless of how familiar borrower & lender are, the standard contract will be extremely long. (at least in the US) There are no "friends and/or family" exceptions.

If the contract does not conform to regulations, it may be invalid, and all the money you lent could simply evaporate since it was the borrower who actually bought the house, and it's the loan contract that's rendered null & void; in that case, it may be better to simply donate the money.

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  • Last month, we finished paying off a mortgage owned by a family member. It surely would have gotten ugly if I'd missed payments, but that never happened.
    – RonJohn
    Commented Nov 2, 2017 at 14:33

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