Family Equity Loan Plan Questions

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We understand first time buyers don’t want to rely on parents for charity and with a Family Equity Loan this needn’t happen. Here are some common questions and answers about the Family Equity Loan Plan

What is a Family Equity Loan Plan?

A ‘Family Equity Loan Plan’ is, in its most simple terms, a safe loan provided by a family member (usually the parents) to provide their children with the deposit to buy their first home. These plans are modelled on popular tried and tested schemes offered by some New Home builders, where the home buyer only has to pay 75% of the full purchase price. The builder then effectively retains a 25% stake in the home as an interest free ‘Equity Loan’ but sharing in any rise in future property values with the buyer. However, unlike the schemes offered by wealthy home builders, the expected commitment to be made by parents within the ‘Family Equity Loan Plan’ is that of a taking an equity loan stake of 10% or more in their children’s house purchase. For many, these plans make home ownership a reality where otherwise it would not have been possible, and are a welcome addition to today’s UK property market.

So what makes this so different from being simply another loan?

What makes this so different from being just another loan is that it effectively provides the parent with a secured stake in the property being purchased, which can be an important feature when helping a child buy their first home. This particularly applies to joint purchases where the longevity of the relationship may yet have to be proven. It can often be difficult to tackle these sensitive issues and concerns within the family, but the Family Equity Loan Plan could provide the most practical trouble free solution allowing parents to help out a son or daughter without committing a large portion of their life savings, perhaps to a largely untested relationship. In fact both sets of parents to the joint purchasers can participate in providing the Equity Loan required to help their children on their way. Initial market research conducted by firstmortgage.co.uk indicated that many more parents would be willing to offer substantial financial assistance to their children if the capital had some initial protection, particularly when their child was making a joint purchase.

Found the answer to your question? Contact us now to discuss the options available to you or see more Parents Questions and Answers for further information about the Family Equity Loan Plan.

Are there any financial risks for me in being a Family Equity Loan provider?

Obviously almost all financial undertakings involve some element of risk and the ‘Family Equity Loan Plan’ is not exempt from this. All loan agreements are based on trust, and this is no different. As the primary lender, e.g. a bank, will have the first charge on the property, should your child not pay the mortgage and fall into arrears on this, the lender can foreclose and sell the property to recover their outstanding debts, which may not leave enough for you to be repaid your equity loan stake in the house. Although house prices may be on hold at present, or be facing a modest drop, the medium to long term reality of housing is one of relatively consistent and sometimes dramatic growth, dependent on market conditions. However, all parties to such an agreement must always recognise that no property investment is guaranteed and that there is always a risk of a drop in property values, particularly in the short term. If the house were to be sold in these circumstances there may not be enough left after the mortgage lender has been repaid to have your own equity loan stake repaid in full.

Why has the ‘Family Equity Loan Plan’ become necessary?

Since the credit crunch hit the world financial markets, lenders have become far more conservative in the terms they are prepared to loan money. This has resulted in the 100% mortgage no longer being readily available to first time buyers as before. The UK property market in recent years has largely depended on first time buyers being able to get 100% mortgage help resulting in fewer young people saving their 10% deposit, and with the higher fuel and living costs we’re all having to endure, the prospect of being able to save this deposit in the short term is highly unlikely. Parental support in helping their offspring onto the property ladder has never been more vital than it is today with a ‘Family Equity Loan’ being one of the safest and most flexible ways in which a parent can help their children spread their wings.

Contact us now to discuss the options available to you or see more Parents Questions and Answers for further information about the Family Equity Plan.

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