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Aston Lawyer
Aston Lawyer, Solicitor
Category: Law
Satisfied Customers: 10128
Experience:  Solicitor LLB (Hons) 23 years of experience in Conveyancing and Property Law
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Hi I need to gain a better understanding on the difference

Resolved Question:

Hi I need to gain a better understanding on the difference between a "second charge on a property" and a "trust against a property".
My husband and I want to buy a house and my parents are giving us 35% of the property's value for us to use as a deposit to get a mortgage. In return, my parents want to have rights on a 35% share of the house.
Is it better if they register a second charge on the property or if we draw up a declaration of trust where we state that my parents have a share in the property?
Does either of these options make my parents legal owners of any part of the property? Does either of these options mean that we become "tenants in common"? What practical rights do these 2 options give my parents?
I already know that our mortgage lender has to agree to this, we found a lender willing to do so.
Thank you.
Submitted: 2 years ago.
Category: Law
Expert:  Aston Lawyer replied 2 years ago.
Hello and thanks for using Just Answer.
My name is ***** ***** am happy to assist you with your enquiry.
Neither a second charge or a Declaration of Trust means your parents become legal owners of the property. It just means that they have a financial interest in the property.
Basically, whenever a party is applying for a Mortgage and part of the purchase monies is coming from a third party, the Lender will not normally grant any Mortgage unless they are content that that money is indeed a gift and is not a loan, as the Lender wishes to make sure that there is no possible danger of them not getting their "money back" were you to default on the Mortgage and repossession proceedings were taken.
I would therefore be most surprised if you have been able to find a Lender who would be happy for your parents to have a second charge over the property. If you have, it would be best for your parents to proceed with you granting them a second charge. The Charge will detail what, if any interest is payable, and the amount they have lent you, and should only say that they are entitled to their money back as and when the property is sold.
If a second charge is not possible, you and your husband can sign a simple Declaration of Trust to say that as and when the property is sold that 35% of the proceeds are to pass to your parents. As I have mentioned above, Lenders are not normally too happy to allow such a document to be entered into as it may affect their security on the property. If they are happy, then great. It would then be up to you and your husband to decide how you were to hold the property- whether it be as Joint tenants (which means you are both entitled to 50% each of whatever equity is left over upon any sale, or as tenants in common, which means you both own a separate percentage in the property.
If the Lender is not prepared to allow a Declaration of Trust to be entered into with your parents (your Solicitor will be under a duty to report to the Lender if he becomes aware that a third party is acquiring any financial interest in the property), it would be normal you and your husband to enter into a separate Declaration of Trust yourselves to say that were the property to be sold at a later date, that you are entitled to the first 35% of the equity from any Sale. This would mean that you will hold the property as Tenants in common, as you are both entitled to a different percentage each upon any sale. This then indirectly protects the money your parents have invested.
I must say that I would be surprised if the Lender agreed to either the second charge or Declaration of Trust with your parents, and that the above third option, being a Declaration of trust just between you and your husband may be the way you have to go.
I hope this assists you and sets out the legal position.
Kind Regards
Customer: replied 2 years ago.

Hi Al,

Thank you so much for the detailed response!

Just to clarify - you said that a second charge would be preferable to a Declaration of Trust - but I don't completely understand why this is the case. Is the second charge more official? Because it sounds like both options give my parents the same rights.

Is there no way to make my parents legal co-owners of the property and add them to the title?

Also, would we encounter more difficulties if we wanted to remortgage with a second charge or a Declaration of Trust, or is there no difference?

Thank you,

Expert:  Aston Lawyer replied 2 years ago.
Hi Julia,
Both options give your parents the same rights, but the Charge will mean your parents will have a "secured interest" which is more valuable to a mere Declaration of Trust document.
A second Charge would be preferable to your parents, as their interest would be registered against the property and they therefore have a "secured Charge". This means, for example, you wouldn't be able to sell the property behind their back, not that you would want to. If they had a Declaration of trust, then this wouldn't for example stop you from being able to re-mortgage the property and therefore increasing the amount of money you would have to pay to your Mortgage Lender upon any sale which may affect how much money your parents ultimately receive.
If they had a second charge, this would make it harder for you to re-mortgage in the future, in that most Lenders will not allow a second charge and hence your parents may have to agree to release their Charge in such circumstances. If the Declaration was in place, this wouldn't apply.
The only way your parents can go on the Deeds is if they were also to go on the Mortgage with you- all legal owners must enter into any Mortgage registered against a property for it be valid.
I hope this helps.
Kind Regards
Aston Lawyer, Solicitor
Category: Law
Satisfied Customers: 10128
Experience: Solicitor LLB (Hons) 23 years of experience in Conveyancing and Property Law
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