Financing the future
Loans or gifts from The Bank of Mum and Dad have become increasingly common as young adults struggle to fund the independence they need.
It comes as no surprise that the major steps into adult life are expensive. Buying your first home, particularly, has always required a significant amount of money. But it’s even harder for the current generation of young adults in their 20s and 30s.
While average UK property prices have risen by 79% in the last 15 years, average earnings have only risen by about 50%.1 This shortfall means anyone wanting to buy needs to save more for their deposit. What’s more, since the global financial crash of 2008, the deposits typically asked for have been higher, meaning an even longer time is required to save.
Perhaps inevitably, young adults have been looking to their more financially secure parents and grandparents to help them out, giving rise to the notion of The Bank of Mum and Dad.
It is, however, much more than a notion or jocular saying. The Bank of Mum and Dad (and of grandparents too) has become a significant force in finance. In fact, The Bank of Mum and Dad now rivals the UK's ninth largest mortgage lender,2 with multiple first-time buyers relying on financial support to buy a home of their own.
For many of our children and grandchildren, it's proving to be almost impossible to set foot on the property ladder without this help.
1Nationwide and the ONS, quoted by Coutts, 2018. 2Legal & General, 2017.
What you can do
If you’d like to help your children, these are some options to consider.
If you have existing savings, you might want to draw on them to help get family on to the property ladder. Often, the bigger the deposit they can raise, the better the interest rate they get on their mortgage. If you do lend money, make sure you draw up an agreement for regular repayments, so everyone knows where they stand.
You might also be able to act as a guarantor for your children or grandchildren’s loan or mortgage. This can boost the amount they are able to borrow and in turn give them more choice. However, it does make you liable for the full amount of the mortgage, not just the amount you’re guaranteeing, if they default.
If you’re happy to unlock some of the equity your own home has accrued, equity release might be the answer. The tax-free cash released as a lump sum, could be used for home deposits. Although releasing the money will reduce the value of your estate, it can often help your children at the time they need it most.
How Helen gave Nick a leg up
When Nick Gale returned to the UK after a lengthy stint abroad, his mother Helen decided to help him buy a home of his own.
Having taken out an equity release plan, Helen gave £65,000 to her son, enabling him to get onto the housing ladder. “I wanted to support Nick when he needed it the most,” Mrs Gale told us. “Equity release has really helped me do this. I can see how happy he is to be finally settled.”
And Nick wasn’t the only one to benefit from his mother’s actions. Helen also used her equity release money to make her own home improvements and take a holiday with her sister.
“Equity release made a huge difference in mine and Nick’s life,” she said. “Now we both have some money behind us, we can enjoy the things we love.”
Remember, equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits. The most popular type of equity release is a lifetime mortgage. This is a loan secured against your home.