Family Equity Home Loan – Good Idea or Debt Trap?

Are you interested in a family equity home loan? This could be a great way to buy a house. But it’s important to know all the facts before you decide.

In this article, we’ll explain:

•  What a family equity home loan is and how it works
•  The good and bad points about these loans
•  The costs you might need to pay
•  How a family home equity loan could help you or your family
•  Other ways to help your children buy a home

Every month, over 6,900 people visit our website to learn about loans, so you’re not alone.

Learning about family equity home loans might feel scary. But once you understand how they work, you can make the right choice. So, let’s get started!

What is a family equity home loan?

A family equity home loan is a loan provided by a family member – usually a parent – to help the aspiring homeowner get on the property ladder. 

It allows family members to help loved ones get on the property ladder while also protecting themselves and their own finances. Instead of simply gifting them money, a family home equity loan could be a more secure method for parents. 

Family Equity might also be an option during a divorce or separation process, as it can provide the person leaving the household with an opportunity to purchase another property to live in.

Family home equity loan – good idea or debt trap?

Family home equity loans can be a good idea for some people. The money will still need to be repaid, but it could prove cheaper than repaying other types of debt. However, it’s best to consider your situation and other options before agreeing.

How does a family home equity loan work?

A family home equity loan works by the family member giving their relative the money to use as a deposit for a property purchase. However, the money isn’t a financial gift; it’s a loan secured against a percentage of home equity in the property. 

For example, a young woman might want to buy a £200,000 property which would typically require them to have a 20% deposit, equating to £40,000. If the buyer only has a 10% deposit (£20,000), the young woman might ask her parents to provide a family home equity loan for the remaining £20,000, which could be what gets her a mortgage or a better deal. 

The young woman would own 100% of her £200,000 home, but the 10% deposit provided by her parents would give them 10% of the home equity in the property. They could then:

1. Arrange repayments on the 10% with or without interest as decided by the parents
2. Arrange for 10% of the property value to be returned to the parents when it’s eventually sold

This isn’t the same as a family assist mortgage, which we will discuss at the end of this guide.

How do family home equity loans help buyers?

Family home equity loans help the buyer because it gives them funds to buy a property which otherwise wouldn’t be possible. Not only that, by having a bigger deposit, it could help them secure a more attractive mortgage deal with lower interest.

How do family home equity loans help donors?

Family home equity loans benefit family members wanting to help loved ones by securing their donation in the property’s equity. 

They can choose to be repaid with or without interest, or they can leave request no repayments and only get repaid when the property is sold. If the property increases in value, their equity will be worth more. Thus, a family home equity loan could be seen as an investment for the donor. 

Can I use equity in my parents’ house as a deposit?

As long as your parents agree, it’s possible to use the equity in your parents’ home as a deposit for your own property purchase.

Your parents could use a home equity loan, equity release plan or extend their existing mortgage to help with your deposit. A family assist mortgage is another option. 

These are briefly explained below.