What’s the difference?
Over the last few years, we have seen a resurgence of equitable charges over property with lenders happy to advance based on an equitable charge rather than a legal charge.
For the borrower, this normally generates the question of ‘what’s the difference?’.
The Legal Charge
A legal charge is usually registered to protect a loan or other risk held by a lender. A legal charge provides the holder with a power of sale over the said property should the mortgage payments or another element of the agreement not be maintained.
Anyone buying a property which is subject to a legal charge must ensure the seller pays off the mortgage on completion otherwise the buyer will be subject to the lender’s power of sale. Most solicitors refer to this as being able to obtain ‘clean title‘.
As its name suggests, a legal charge is an actual legal interest in land or property, just like a right of way, and so it is capable of binding future owners of a property even if they were not a party to the original mortgage contract.
The Equitable Charge
Equitable charges normally come about because an attempt was made to create a legal charge but the formalities were not dealt with correctly or it was not possible to obtain the legal charge. Holding an equitable charge does not give the holder a power of sale, though they could go to court and obtain an order for sale based on their equitable charge.
With lending, the legal charge holders have to give consent for another legal charge over the same property. Consent is not required for an equitable charge. For this reason, lenders will often take an equitable charge because their request for a legal charge was declined, or their previously unsecured borrowing has defaulted and they want to protect their position.
In the same way, as with a legal charge, the equitable charge will pass on to the new owners of the property upon sale if not cleared beforehand. This means property subject to an equitable charge cannot be sold until that charge is cleared.
The big difference is in the power of sale.
The big issues to know
- If you default on unsecured borrowing then the lender could apply for, and obtain an equitable charge over your property. It’s why lenders prefer to lend to homeowners and why borrowers who think they can walk away from their liabilities are often surprised they cannot.
- Bear in mind that the above applies as much to directors guarantees (they are a form of unsecured borrowing – or risk) so mitigating that risk through insurance or another means is well worth considering.
- When considering whether to borrow unsecured or secured the consider the cost difference then consider what could happen in the event of default regardless. It is a balancing act, just give it greater consideration as unsecured is not always as unsecured as you think.
By Dave Farmer