Lending Money to Your Children? Remember to See a Lawyer First!

houseParents frequently lend money to their children to help them get on in life. As a High Court case showed, however, trust in loved ones can be misplaced and that is why legal advice should always be sought before entering into such arrangements.

The case concerned an emotionally vulnerable woman who agreed to help her son raise funds for a business venture by remortgaging her home for £31,250. He told her that the loan would swiftly be redeemed. Behind her back, however, he in fact mortgaged the property to a bank for £120,000, a sum that had not been repaid. He was subsequently convicted of defrauding his mother.

After the bank launched possession proceedings with a view to recovering the loan, a judge set the mortgage aside on the basis that the bank had been sufficiently on notice that the son had subjected his mother to undue influence. That meant that she was only required to repay the £31,250 she believed she had borrowed.

That, however, was not the end of the matter. At the same time that the mortgage was entered into, the mother had transferred her home into her and her son’s joint names. In those circumstances, the bank successfully argued that it was entitled to enforce payment of the debt against the son’s half of the property. In practice, that meant that the woman’s home would have to be sold.

In dismissing the woman’s appeal against that ruling, the Court noted that it was impossible not to feel sympathy for the position in which she found herself. However, it was established law that, by operation of Section 63 of the Law of Property Act 1925, where a legal mortgage in respect of a jointly owned property is set aside on the application of one owner, the lender continues to have an equitable charge over the beneficial interest of the other.