Or is The Bank of Mum and Dad an unsustainable major player in the mortgage market?
The Bank of Mum and Dad is a major player in the UK property market. But with house price inflation way above investment returns and wage growth, how can a parent or would-be parent sustain their desire to help their children onto the property ladder?
When it comes to the younger generation buying their first home and moving up the property ladder, there is a new mortgage lender on the block.
Helping children onto the property ladder
According to the recently published Legal & General and Centre for Economics and Business Research (CEBR) “The Bank of Mum and Dad” report, were parental contributions to the home purchase of children and grandchildren formalised into a business it would be a top 10 mortgage lender. Further evidence of the increasing importance of parental support of the property ladder is provided by Lloyds Bank.
However, there are risks associated with helping children buy a home that most parents don’t consider, and creating a sustainable model for continuing financial support may require new thinking.
The ‘Bank of Mum and Dad’ is a well-mined resource
The Legal & General report produces some astounding statistics:
- 25% of all mortgage transaction this year will be aided by parental contribution
- The average amount provided will be £17,500
- The total amount given by the Bank of Mum and Dad will be more than £5 billion (Lloyds Bank puts this figure even higher, at £8 billion)
- This will provide deposits for property purchases worth a total of £77 billion
The majority of this funding is provided by way of gifts, though around 20% is made by way of loans with interest payable. And with Lloyds Bank saying that one in five children will return to their parents for further funding when moving up the property ladder, clearly the Bank of Mum and Dad may be an even larger player in the property market than Legal & General believes.
Indeed, Lloyds Bank’s October 2015 report says that more than half of people looking to move up the property ladder, and progress from first home to second home, wouldn’t be able to do so without parental help – and that the biggest barrier to moving home is the size of the deposit required.
For Lloyds Bank, Mortgages Director Andrew Morgan says, “Parental support has been playing an important role in helping young people get on the property ladder for decades but this is being stretched further, with many Second Steppers continuing to be reliant on the Bank of Mum and Dad to help them make the next move.”
Sacrifices made by Bank of Mum and Dad
While many parents have untapped equity in their homes, very few use this to fund the financial help their children need to get a foothold on the property ladder. Instead, capital is raised from a number of other sources:
- Savings and investments
- Early withdrawal of pension funds
- Downsizing and releasing profits
- Borrowing to fund children’s home purchases
This depletes emergency cash, reduces the potential to fund retirement, and lessens lifestyle choices in later life. Parents are naturally willing to make these sacrifices for their children. However, there are other risks that few parents consider.
The risks of providing Bank of Mum and Dad money
For parents, there are a number of risks associated with providing funds for home purchases made by children. Some of these are obvious, others less so:
- For example, few parents consider the financial implications should their child’s marriage dissolve into divorce
- With an average of 37% of a family’s wealth now given over to helping children get on the property ladder, the financial safety net that has taken decades to build is rapidly depleted
- Perhaps the biggest and least considered risk is that of the potential for the gift to fall into an inheritance tax trap: there are rules about how much money can be gifted, and any money over £3,000 in a single year will be considered potentially liable for inheritance tax for seven years
- If the help toward a deposit is made as a loan rather than a gift, the possibility of unexpected inheritance tax demands is removed. However, any interest paid becomes income received and could be liable to income tax
- If the parent helps out by acting as a guarantor, the parent’s home could be put at risk
The Bank of Mum and Dad is expected to be a depleting resource as property prices rise and wages stagnate. Legal & General predicts that the average of a family’s wealth used to help fund a child’s home purchase will be more than 50% by 2035 (and in London, this figure would be the entire net wealth of the parents). Clearly, while the Bank of Mum and Dad is an important resource in the property ladder, it would appear to be an unsustainable one.
Where to now for Bank of Mum and Dad?
For today’s parents and would-be parents, a major concern will be their potential to help fund their children’s futures.
Though borrowing costs are low at present, there is no guarantee that when he time comes to help a child onto the property ladder they will still be so.
Investment performance has stagnated, and is threatening to continue likewise. In fact, the FTSE 100 is at the same level today as it was in February 1999 – that’s 17 years with no capital gain! International markets have fared better, but with a potential Brexit upon us, who knows what will happen to the value of the pound? (If Sterling moves the wrong way only a little bit, you could lose any investment advantage.)
A parent of the future might decide to downsize and release equity to fund the purchase of a child’s home, or to release pension funds early. Both these routes will severely dent the lifestyle of the parent.
The answer is to look for an investment opportunity - a vehicle that will keep pace with the capital growth of the property that a child is likely to want to buy as a first home, while also providing the potential to provide income that can be used to fuel further investment.
Property investment begets property
By deciding to invest in property early, and then doing so, parents or would-be parents are hedging themselves entirely against further price rises in the property market. And the income received from renting out the property will help to fund the mortgage, service repairs, and, over time, increase to provide the means to help fund the purchase of a child’s first home.
On top of this, the continuing income from the property investment will provide a significant boost to the parents’ retirement income.
Of course, property investment strategy begins with in-depth property research: but select the right property in the right location and capital gain and income could easily outstrip house price inflation and wage growth. With a 3+1 strategy, not only might parents be able to help fund a child’s first home but also bring their own financial ambitions closer, too.
For those that don’t have the time to manage a property investment – the day-to-day tasks such as maintenance, rent collection, and tenant management –employing the services of a professional property manager is a cost effective way of reducing workload and investing for a family’s future.
As the old saying goes, money begets money. In today’s world, where parental help is key to that first home purchase, property begets property – it’s the fuel behind climbing the property ladder. What plans do you have in place to bankroll your children when they ask in that all too familiar tone: Daaa-aaad...?