Challenges in the Scottish property market
In this period of political and economic uncertainty, it is vital that purchasers tread carefully through the challenges of the current Scottish property market. We are entering a period of recession which is expected to last at least two years following the market upheaval of Covid-19. Furthermore, in recent weeks we have seen the knee-jerk reaction from lenders following the announcement of the Mini-Budget, causing increasing rates of borrowing and withdrawals of mortgage products. Many lenders have resumed lending, but purchasers have been left feeling apprehensive with regards to their mortgage affordability amidst the changing mortgage rates, the cost-of-living and rising energy bills. Despite this turbulent economic backdrop, the Scottish property market and in particular the Edinburgh and Glasgow markets, remain buoyant with sellers setting competitive closing dates and achieving multiple offers in excess of Home Report valuations, albeit with some dampening of prices in the past month. With this in mind many of our clients are asking if it is a good time to invest in property, particularly parents or grandparents looking to help their children/grandchildren on to the property ladder.
Familial loans – use of a Standard Security / Loan Agreement
The traditional way of borrowing is most often taken when purchasing a property, through a high street lender. In exchange for providing financial assistance, the lender will require financial security against the property being purchased by way of a legal document known as a “standard security”. This is registered against the property in the Land Register of Scotland.
However, another option is open to families where finances allow. Our residential team are well versed in advising on situations where for example, parents wish to purchase a property in their children’s names but wish to protect the funds invested either as a loan or gift. Similar to a lender’s standard security, the family member who is providing financial assistance (the “lender”) to the purchasing family member (the “borrower”), will have a registered standard security against the property, together with a loan agreement which clearly specifies the basis of the borrowing.
Benefits of familial standard securities
What are the benefits of familial standard securities?
- Specific dictation of the terms of the standard security: Fair terms can be agreed between the family members. For instance, the circumstances that trigger repayment, repayment periods, failure of repayment and interest rates.
- Protection to the “lender”: Whether assistance is large or small, such assistance should be in writing and should be clearly defined as either a loan or a non-returnable gift, depending on the individual circumstances. Further protection is required where a property will become a matrimonial home.
- Registered interest: The standard security is registered against the property prohibiting the borrower from selling the property without the lender’s consent. Further terms can be agreed to prevent the borrower from taking out additional borrowing on the property without the lender’s consent.
If you are looking to assist a family member in their property purchase or if you have a family member with funding available to utilise and wish to explore this arrangement, please contact our residential team to discuss.