Hello, my name is Jade Smith and I am a Business Relationship manager at Equilaw. Today I am joined by our Business Development Director Matthew Taylor, to discuss the topic of shortfall funding. Today’s content has been provided by our in house Associate Solicitor, Lucy Batten. 

For this podcast, I am going to step into the shoes of a financial adviser raising common questions around this topic.

If my client needs to provide additional monies to repay debt that must be redeemed upon completion of the equity release or to pay a third party. What is the legal process for this?

At Equilaw we call this a ‘shortfall’ but you may also hear the term ‘funding’. The client essentially has two options, they can either make the payment themselves direct to the relevant person prior to the equity release completing, or they can send the money to us and we will make the payment on their behalf. If the payment is sent to us however, we will need to conduct checks on the source of funds before we can accept this in order to comply with the Money Laundering Regulations and also lender requirements.

So is it easier for the client to make the payment Matt?

It is potentially faster in terms of there being less checks to complete, however there are a couple of key things to bear in mind.

Firstly, if the third party that requires payment has instructed solicitors, they will not accept funds direct from the borrower, as they will need to conduct the same checks we would.

Secondly, if the client were to make a part payment ahead of completion, the lender will want confirmation this has been received and evidence that the amount required to pay on completion is now available from the equity release proceeds. This means that the payment would need to be made ahead of completion so the client will need to take a risk of paying the money with no watertight guarantee that completion of the equity release will take place. Perhaps not an issue if they wanted to make the payment regardless but if they only wanted to do this on the basis of the equity release completing, then there is a risk of that not happening. 

That’s interesting Matt, can you please give me an example? 

Yes so let’s say the client wants to use their Equity release and savings to redeem an existing mortgage. They want to make the payment direct to the lender in advance, to avoid the work and time required in us conducting the necessary checks on their source of funds. 

They make their payment to their lender and the lender issues a new redemption statement, confirming the updated amount required to redeem. This is now within the amount of the available equity release proceeds. However, despite the lender being ready to set completion before, an issue has now arisen that was not picked up upon first review. Whilst this is rare, this can happen because the file is sent for final pre-completion checks. The lender and their lawyers conduct a final review of everything and a problem can arise. Or, perhaps as part of the pre-completion checks a negative entry has been revealed on the pre-completion land registry search. There could also be an issue if the offer expired while we were waiting for an updated redemption statement and the client wasn’t happy with the new interest rate.

Ok, so with that in mind is it better to send the shortfall monies directly to Equilaw then?

On the plus side, if the part payment is made to us, we will hold this on the client’s account to be to used alongside the equity release proceeds on the day of completion. We then redeem the mortgage in one payment. If completion of the equity release does not happen for any reason, we return the client monies to them.

Usually our process doesn’t cause any problems, but the client’s expectations will need to be managed. If identifying the source of funds is straight forward, i.e. money is from one source such as inheritance that can be easily verified by another lawyer or document, then this might not cause much delay at all. However, if the funds have accrued over time or from a number of different sources, perhaps over a lifetime from savings, we are going to need a lot of information, some of which might be historic and have to be ordered from their bank or building societies. So this may feel intrusive and take some time. If clients haven’t completed this sort of transaction, since the introduction of the stringent regulations, they may object to this intrusion or feel that it is unnecessary. So any help from the adviser in explaining that these requirements are now law, and thus unavoidable, would be appreciated.  

Thank you Matt, what happens in a situation where a client doesn’t have the funds themselves and perhaps they are being gifted by a third party, such as a family member?

This is potentially okay but we need to complete the same checks on the source of funds, as we would do with the client. In addition, we will need to arrange for identification of the third party by a lawyer. This is an additional step that is necessary because the third party wouldn’t otherwise be identified as part of the transaction, whereas we are already identifying the client of course.

It is also important to mention that the lender will not accept any third party interest in the property, so for example the monies being provided will have to be an outright gift and not a loan to be secured on the property and repaid. Of course there are always rare exceptions but this is the general rule.

Great, so in a scenario such as this, would a third party need to sign any paperwork for Equilaw?

Each lender has different requirements and these can also vary by funder. We recommend that following instruction, you provide us with as much information about the gifting situation as possible: i.e. what relation is the giftor to the client, how much is the gift and is it an outright gift? We can then confirm the lender’s requirements. Some lenders may need the third party to sign a declaration to confirm that they are not claiming any interest in the property. 

Thank you, is there anything else you would suggest Matt for myself as an adviser?

Yes, as with the client providing monies, it is really helpful to manage expectations at the outset and let the client know that the person providing the money will have to be willing to potentially declare that the money is an outright gift. They will also need to be identified and also provide evidence as to their source of funds. They can then begin to arrange this while we confirm the lender requirements. 

Understood thank you. Does this additional work involve any additional fees?

We have an additional fee for the time and expertise required to check the funding information and also to deal with gifting requirements: our additional fees are available upon request. The client will also likely need to bear the cost of an appointment with a lawyer to have their ID verified as mentioned earlier.

Thank you Matt, this is a very common scenario that advisers often raise questions on. I hope today’s listeners have found this podcast material useful, don’t forget that we have more podcasts such as this to download and listen to today.