If you take out a mortgage to buy your home, your lender will almost certainly register a charge against it at the Land Registry. The charge does not transfer ownership. However, it will give the lender important rights, including the ability to sell your home if you default on your loan.
‘When borrowing to buy a property, most of us give little thought to how the lender protects their interest,’ explains Neil Shearer, a Conveyancer in the residential property team with Kidd & Spoor. ‘However, the creation of a legal charge will affect how you, as an owner, can deal with your property. Conversely, if you decide to lend money to someone, for example to get on the housing ladder, it can be a useful tool to protect your loan.’
In this article, Neil answers some of your frequently asked questions about registered charges on property.
What is a registered charge?
Although there are technical differences between a charge and a mortgage, people often use the words interchangeably. A charge is a legal interest in property, which the owner (called the chargor or mortgagor) creates in favour of a third party (the chargee or mortgagee). This is usually to secure debt, typically a mortgage used to buy a house. A charge gives the lender certain rights over the property. For example, they can sell the property and use the proceeds to pay off the outstanding debt if the borrower is unable to.
Most land is now registered at the Land Registry. If this is the case, to be legally effective, the charge must also be registered. It is then known as a registered charge.
If the land is not yet registered, then the creation of a legal charge will usually mean the owner must apply for registration of both the land and the charge.
Registration of a legal charge also provides a state-backed guarantee of its validity, so it is the preferred type of security for many lenders.
How does a registered charge affect me as a property owner?
The existence of a registered charge is unlikely to affect you on a day-to-day basis provided you comply with your mortgage terms; it is important to know what these are. For example, many standard mortgages will prevent you letting your property without your lender’s consent. There are certain statutory safeguards, but failing to comply with your mortgage terms could put your home at risk.
However, when selling your property or remortgaging, you or your solicitor will need to deal with any registered charge. First, you must check carefully the amount needed to pay off your outstanding debt. You will need to repay this to ensure the lender releases their charge on completion. Remember to factor this into your budget. The mechanics are usually quite straightforward, although this will depend on your lender. Having a solicitor who understands your lender’s detailed requirements can help ensure the process runs smoothly.
There is a restriction against my title at the Land Registry. Is this normal?
It is quite common for a lender to restrict a borrower’s ability to transfer or grant another charge over the property. Your property is their security for your debt; they may not want the hassle of having to deal with a third party or to risk their security becoming diluted. The restriction typically prevents the registration of a disposal or another charge without their consent.
During a sale, this is usually not a problem if you are using an experienced conveyancer. Provided the restriction clearly refers to the charge you are paying off, the Land Registry will cancel it automatically. However, your solicitor should check the wording of the restriction carefully. If it does not refer specifically to that charge, they may need to apply for its removal so your transaction can proceed.
Can you have more than one registered charge over a property?
In theory, there is no limit to the number of charges you can register against a property. However, many lenders restrict their borrower’s ability to take out a second mortgage, and you will need to check your mortgage terms and any restriction carefully. If you want to borrow more money, secured by a second charge, you may need your existing lender’s consent. They will want to make sure you can afford both loan repayments. They may also require your new lender to enter a deed of priority. This sets out how the lenders will deal with the property, and apportion the sale proceeds, should one of them realise their security. In practice, some borrowers prefer to remortgage for a larger amount than to negotiate a second charge.
I have finally paid off my mortgage, what happens next?
This depends upon your mortgage lender. Some charge an administration fee for releasing their security, particularly if you are paying your loan off early. Many lenders release their charge automatically once you have paid your debt in full. They should send you details of this with your final redemption statement. If in any doubt, speak to your lender.
Your solicitor can check Land Registry records no longer show the charge registered against your property. You should ask them to do this before putting your property on the market. Having to chase an old lender to formally release their charge could unnecessarily delay your transaction.
If I lend money, can I secure it with a registered charge?
Yes, but speak to your solicitor first. If you are acting commercially, for example, through peer-to-peer lending, you may require authorisation from the Financial Conduct Authority. If your main purpose is to help a family member, and you do not charge interest, it is unlikely you will require authorisation. However, the rules are complex, and the potential penalties for non-compliance significant. So, it is important to take professional advice. Our solicitors have experience in this area and can help guide you through the detailed requirements. If you are lending money to a company, the charge must also be registered at Companies House within the statutory time limit to be valid.
I am lending money to a family member; do I need to register a charge?
Perhaps you are considering lending money to help your child buy their first home. In this case, taking a legal charge over their property may seem a little formal. However, being clear about expectations at the outset, for example, when and how they should repay the loan can prevent ill feeling or disputes arising later. It can also help if you are concerned about treating all your children equally. Putting the arrangement on a formal footing can head off any suggestion of favouritism. There may even be issues which are not immediately apparent, which discussion with a trusted advisor may bring to light. For example, what do you want to happen if your child runs into difficulties repaying? Setting this out in a separate loan agreement, but referred to in the registered charge, would also help to keep those details off the register and private.
Having a registered legal charge means you should be able to recoup your advance even if your child’s circumstances change. For example, if they lose their home because of marriage break-up or insolvency. The loan will also form part of your estate should you die – unless, of course, you agree to write it off in that event.
How we can help
If you have plans that involve a registered charge, then discussing your intentions with your solicitor in advance will mean they can tailor arrangements to suit your individual circumstances.
For further information, please contact Neil Shearer in the residential property team on 0191 297 0011 or email ns@kiddspoorlaw.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
