The 'Bank of Mum & Dad' has long been a great help for children trying to afford their first car or motorbike or helping to fund the 'year off' prior to going to university. Increasingly though, 'Bank of Mum & Dad' or as it is now referred to 'BoMaD' is becoming a significant money lender for mortgages as children try to gain a foothold on the property market.
Recently BoMaD made the headlines when the findings of a new report were published. The report found that BoMaD is now the 11th largest mortgage lender in the UK – paying out more than £6bn to help children in their late twenties and early thirties to buy their first property.
How Much Are Mum and Dad Contributing to the Property Market?
The Legal & General report (https://www.legalandgeneral.com/bank-of-mum-and-dad/bomad-report-2019.pdf) reveals that 62% of home buyers under the age of 35 have been helped by their parents and the financial help they received averages £24,100 – but in London and some other areas the average financial help given is £31,000. This level of contribution is growing too as it increased by £6,000 in just one year (2018 figures). Interestingly, whilst the level of financial help from parents increased by 20% in the last year, property prices have not as the market has slowed down. Parents will be contributing a huge £6.3bn to property sales and this figure is up from £5.7bn in 2018. In 2018 the number of properties bought in the UK with financial help from parents was 316,600 (cebr analysis).
The contribution to the UK housing market made by Bank of Mum & Dad is greater than the government's schemes such as 'Help to Buy' which are designed to address the problem of housing affordability. It is estimated that BoMaD will help to buy £70bn worth of property in 2019.
With wages increasing very little – if at all – until recently, many first time buyers are struggling to get on the property ladder. As well as 62% of those aged under 35 years receiving financial help from parents, 36% of those aged 35- 44 years and 22% of buyers in the 45 - 54 age group relied on support from their parents. It is a good time to buy property as more people than ever are currently working and mortgage rates are at a record low – but competition to secure a mortgage is strong.
BoMaD is not just helping to fund starter homes for children, many are helping their children to make the next step on the property ladder. In 2019, the most popular property purchase was a three-bedroomed flat or house which was 44% of the market supported by BoMaD. 38% of the properties bought with parents' financial help were two-bedroomed and 15% were properties with four bedrooms or more.
The current market conditions are definitely more favourable for first time buyers too, as the increase in property prices has slowed down. In 2018 it was 3.3% across the UK and just 3.0% in England. This is welcome news as the increase in prices recorded in 2016 was 7.0%. The current average drop in prices reflects the falling prices in London (1.9% in the year until March 2019) and the south east in general where prices have dropped 0.4%. Having said that, ten years ago, the average home cost £150,000 and by 2023 this figure will have doubled. Cebr (Centre for Economics and Business) predicts that house prices will start to increase in 2020 and this will reach 4% per annum by the year 2023.
In the Legal & General report, whilst the positive benefits of financial funding by BoMaD are recognised, it is felt that the help given does highlight the problem that those younger people who cannot get financial help from their family cannot get onto the property ladder and the social division of those who can and those who cannot broadens. Getting funding by parents also creates a dependency on them which can last many years.
Bank of Mum and Dad Negatives
The main negative side to this situation is that many parents are older and the money that they are using to help fund their children's property purchase is often savings that they themselves will need to give them financial security in their retirement years. With people now living longer and enjoying a more active life until a greater age, many parents will need the money that they have contributed to their son/daughter's property purchase to use in their later life.
This problem is compounded by the fact that it is not only parents who are helping their children, but also their grandparents and other elderly relatives, and even close family friends. To help their offspring afford their first home, parents and other family members are dipping into their bank accounts (53%) and ISAs as well as home equity and pension plans. 13% of parents open a 'Help to Buy ISA' in their child's name to take advantage of the 25% 'first time buyer' bonus that the government provides. 10% of parents have invested in shares or other assets to help their child with their property purchase.
A number of parents keen to help their children by lending money, do not have 'nest eggs' of their own so to provide financial assistance, one in ten are cashing in pension plans, another 16% using equity release, downsizing their own property (14%) or borrowing money themselves (6%). Unfortunately, parents' generosity will have real consequences for many in the future. The survey found that more than a quarter of BoMaD lenders expressed concerns about financial security for their own retirement and some felt that they would probably have to postpone retiring from work so that they can continue to fund their children and accrue some more savings for their own future.
The Bank of Mum and Dad is definitely the most generous mortgage provider of them all! 59% of parents providing mortgage money to their children said that it was a gift and that there was no need to pay it back, and a further 14% of parents give their money as a mixture of gift and loan. Only 6% of those parents/grandparents giving a loan to their offspring charged any interest at all.
A very positive aspect that the report did find is that parents and grandparents who were acting as BoMaD were thinking carefully about their own financial position and assessing the various financial avenues open to them. One method that is proving popular is the lifetime mortgage which gives parents the opportunity to access their own home's financial value and use it to provide a ‘living inheritance’ to their children so that their children can benefit financially now as they try to buy their own property and then in years to come.
The Legal & General report does call for action to address the major problem in the housing market which is the lack of affordable homes and calls for many thousands more to be built to ease the situation and of course to lessen dependency on the most popular and generous bank of them all.