Buying a first home has become increasingly challenging, with rising property prices and higher upfront costs putting additional pressure on prospective buyers.
Our banking lawyers explore the flexibility and legal considerations of private lending arrangements that can help first-time buyers finance their first home when traditional mortgages are not accessible or suitable.
Alternative to institutional lending
Recent reductions to the nil-rate band and first-time buyer stamp duty thresholds mean that purchasers now pay stamp duty on lower-value properties than before, increasing the funds needed at the outset.
Therefore, many first-time homebuyers are exploring alternative ways to finance their purchase in place of the usual mortgage option from an institutional lender, including seeking support from a private individual, such as a friend, family member, or trusted acquaintance.
Why first-time buyers consider private loans
A property purchase typically involves not only a significant down payment but also additional funds for surveys, stamp duty, legal fees, moving costs, and any refurbishment works needed after completion of the purchase.
Providing financial assistance to a friend or family member can ease this financial burden and make homeownership feel more achievable.
In some cases, private lending is considered because the buyer’s employment or credit history makes accessing a traditional mortgage difficult.
Lending to a friend or family member can feel more personal and can offer greater flexibility than institutional lending, particularly as both parties have an existing relationship.
Structuring a private loan agreement
When considering making a private loan, it is important to consider how the arrangement will be structured, with specific focus on the amount of the loan, repayment terms, length of the loan, interest provisions (if any), and whether security will be required.
Some private lenders choose to provide funds specifically for the deposit, while others may wish to cover costs associated with the purchase, and others may be willing to lend more substantial sums that could cover the entire purchase price of the home.
Some lenders prefer regular repayments, similar to what a bank might expect, whereas others are comfortable waiting until the property is sold or refinanced before the loan is repaid in full.
A private loan may form part of wider long-term estate planning by the lender and advice in this context should be sought at the same time.
Could a loan from a private individual be a regulated financial activity?
Loans secured against residential property may be subject to the Financial Services and Markets Act 2000 if they meet certain criteria.
Carrying on a regulated activity without authorisation from the Financial Conduct Authority (or without a valid exemption) may be a criminal offence.
As such, legal advice should always be sought before securing a loan against residential property.
A one-off mortgage securing a loan to a family member or friend may not be regulated.
However, the circumstances of each loan arrangement will need to be assessed on a case-by-case basis, including the terms of the loan, the relationship of the parties, and the circumstances of the lender.
Our Banking and Residential Property Teams can provide advice on this issue.
Next steps
Providing financial assistance to a first-time buyer can be a helpful way to support someone in moving up the property ladder.
However, before doing so, it is essential to seek appropriate legal and tax advice.
Our Banking Team can assist with private loan arrangements, including:
- Drafting a private loan agreement;
- Checking the title of the property to be purchased by the borrower;
- Drafting a charge over the borrower's newly purchased property (if required);
- Negotiating the documentation on your behalf;
- Facilitating completion and registering the charge at the Land Registry; and
- Providing an assessment of whether or not the proposed arrangement is a regulated financial activity.
Contact Our Banking Solicitors
If you are considering supporting a first-time buyer or exploring a private lending arrangement, contact our Banking Team to discuss how we can guide you through the process with clarity and confidence.
0161 941 4000
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Palma Percze
Associate
Palma is an Associate in our Corporate Team. Palma has experience assisting with various corporate matters including M&As, disposals, reorganisations and drafting shareholders’ agreements and articles.
About Palma Percze