I am not a solicitor, but can give very basic advice and never 'guess' .
The solicitor will ask why your sister is not inheriting the house with you and the niece. Is it because she is benefiting through the legal charge? Although she is only getting her own money back.
Your sister could easily state that her entitlement is not the �8k plus base rate, but a pro rata share in the house value.
For example, the house was bought for �16,000 with �8,000 of your sister's money. This would give her a 50% share.
The house is now valued at �200,000 - which would entitle your sister to �100,000.
My honest view given the limited facts is that you should pay your sister the �28,000.
But if you are sure this is not what your mother intended, get proper legal advice from a solicitor. You are probably aware that if it goes to court, any proceeds of the house and more could easily be swallowed up in legal fees.