Family loan works well but seek legal advice

STRUGGLING first-time buyers often get their toe on the property ladder thanks to the generosity of mum and dad. But providing financial support can be a problem for parents whose wealth is tied up in the family home. One option is to use some of their equity.

Several lenders – big and small – enable this to happen through special family loans.

These work by letting parents allocate equity in their home to act as the deposit for their offspring’s purchase, without releasing it. Building society Tipton & Coseley is one lender to have recently improved the terms of its ‘family assist’ loan. It has reduced the percentage of parental deposit required from 35 to 20 per cent of the property purchase. The parent must have at least 40 per cent equity in the family home. With the charge on the parent’s home acting as the 20 per cent deposit, the child can then take out a loan up to £400,000. The mortgage has a discounted variable rate currently set at 3.49 per cent – 1.75 per cent off the society’s standard variable rate.

An alternative approach is for parents to set aside the 20 per cent deposit in a linked Tipton savings account. This pays a modest 0.2 per cent interest. The parents can then claim back the deposit once the child has built sufficient equity in their home.

VERDICT:

This family loan arrangement works well when parents have no ready cash to help their child’s home purchasing ambitions. But legal advice is a must. A more straightforward strategy would be to encourage offspring to save hard for their own deposit. Lenders are delivering increasingly attractive deals for first-time buyers with as little as 5 per cent to put down. One of the cheapest is a twoyear fix at 3.09 per cent from HSBC.