Can you afford to open the Bank of Mum and Dad?
New research predicts that in 2018 one in four UK housing transactions will rely on parental help. That means 316,600 transactions in total, an increase of 18,300 over 2017, according to Legal & General with the Centre for Economics and Business Research.
There is no doubt it is harder than ever for first-time buyers to get on the ladder, the same study suggests almost three in every five homebuyers aged under 35 receive financial help from family and friends.
Although widely speculated to be slowing, house prices in London and the South East increased 54% and 42% respectively between December 2012 and December 2017 according to figures from the Office for National Statistics.
The growing concern is that whilst prices and the need for help continue to rise, the Bank of Mum and Dad may be running low on funds. The average gift or loan towards a purchase is predicted to decline by £3,600 this year:
|£21,600 avg. contribution||£18,000 avg. contribution|
|£29,400 in London||£30,600 in London|
|298,300 transactions||316,600 transactions|
|£6.5bn total||£5.7bn total|
Nigel Wilson, Group Chief Executive of Legal & General explained: “The fact that in 2018, 1 in 4 housing transactions in the UK will be dependent on the Bank of Mum and Dad, while hard-pressed parents are finding it more difficult to provide the funds to help their family with deposits, will further exacerbate the UK’s housing crisis.”
Total parental assistance is predicted to reduce from £6.5bn to £5.7bn. While the heart may want to help, the head may be more cautious, worried that it might leave them in financial difficulties later in retirement.
Wilson continued: “People are feeling a bit of a pinch around the economy and therefore we’re seeing pretty much a national trend outside of London for less to be given.”
Where did the help come from?
- Almost three quarters of parents used savings
- A third downsized or released equity in their home
- Another third used pension savings
Worryingly, the report also concluded that:
- One in five parents have had to accept a lower standard of living
- One in 10 parents were left feeling less secure about their own financial future
- Only 23% of parents took any kind of advice beforehand
The solution? Careful, considered financial planning.
Be realistic: It may sound obvious, but what can you afford? Cashflow forecasting is a valuable exercise to plan your retirement in any situation as it will show you the effect over the short, medium and long term as to whether you can help. If you have more than one child, it will also show you whether you can afford to repeat your generosity in the future.
Identifying appropriate sources of income is equally as important; should it be savings, investments or pensions? Cashflow planning will help identify the first and last places to ‘raid’.
Be clear: From day one, make sure everyone involved understands whether your help is a gift, a loan, a loan with interest or an investment. In either situation, get a legally binding agreement drawn up by a solicitor, this protects everybody.
Help your children maximise their savings: Lifetime ISAs and Help to Buy ISAs are both available to top-up any savings your children have been able to make. At a glance:
|Lifetime ISA||Help to Buy ISA|
|Designed to help people aged between 18 and 40 save up for their first home, or retirement||Designed for first-time buyers, aged 16+ who are looking to save up a deposit for their home|
|The Government gives you a bonus worth 25% of what you pay in, up to £4,000 per year||The Government adds 25% to your savings, for a maximum bonus of £3,000|
|You can use it to buy a home worth up to £450,000 anywhere in the country||You can use it to buy a home worth up to £250,000 (or £450,000 in London)|
The Lifetime ISA rules mean you’ll have to wait at least a year before you can use one to buy a home. The Help to Buy ISA, on the other hand, will pay out a maximum bonus of £400 after just three months once you’ve got £1,600 in total – you’ll need to put in the maximum amount of £1,200 in month one, and £200 in month two and three.
Looking at a new build?
With a Help to Buy loan the Government lends you up to 20% of the cost of a newly-built home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. You aren’t charged loan fees on the 20% loan for the first five years of owning your home.
To reflect the property prices in London, as of February 2016 the Government increased the upper limit for the equity loan it gives new homebuyers within Greater London from 20% to 40%.
Consider your mortgage options.
You could buy with them and own part of the property or re-mortgage your own property. There are also family orientated mortgages on the market:
- Guarantor mortgages allow borrowers to take on larger loans if a close family member is prepared to act as a guarantor on the whole debt being raised. This is typically arranged with a parent being asked to join in on the mortgage (taking care to ensure that the extra 3% 2nd home stamp duty is not charged) or by the close family member acting as a guarantor and signing to agree they will pay the mortgage if the borrower cannot. The lender will usually look to see if there is sufficient income to cover the guarantor’s normal needs and expenditure plus the new mortgage payment being guaranteed. As a result, it is not common for a lender to lend to anyone on retirement income only.
- You shouldn’t have to put your home up as security for the loan, although money is frequently raised against a parent’s house to lend or gift to their child. We would always try and avoid a new mortgage being crossed guaranteed against a parents’ house if possible.
- Equity release / Roll Up mortgages are now the most popular option for older clients helping out children or grandchildren by raising money on their homes.
- Family offset mortgages are where parents put their savings into an account linked to the child’s mortgage. The children can’t get at the money, but it effectively serves as a deposit on the property and lowers the interest rate. The advantage is not having to give away your money, although it will be tied up for an extended period.
So, can you afford to open the Bank of Mum and Dad?
By engaging with a financial planner, properly considering your options and the effect of reducing your asset base, we can help you find out. You can then make a truly informed decision based on all the available evidence.