The Bank of Mum and Dad is funding over a quarter of UK house sales. As property prices remain high, younger generations are turning to family for financial support. But while you want to help, it can be a worry.
Research from Legal and General estimated that in 2018 the Bank of Mum and Dad will:
- Lend nearly £6 billion; supporting property purchases of £81 billion
- Give an average of £18,000
- Support 27% of first-time buyers
It’s clear that parents and grandparents want to support family members. However, it can come at a cost. Almost one in five aged over 55 are accepting a lower standard of living when they help loved ones get on the housing ladder.
- 14% of all Bank of Mum and Dad transactions are supported by equity release
- 20% are supported by downsizing
- 17% of these ‘lenders’ would be worse off because of providing financial assistance
- 10% said they would feel less financially secure
- 4% postponed retirement after helping a loved one get on the property ladder
Chris Knight, CEO of Legal & General Retail Retirement, said: “Parents and grandparents across the UK are often digging deep into their pension pots to support loved ones, balancing the housing needs of their children and grandchildren with their own retirement goals.
“Worryingly, in the majority of cases, these individuals aren’t taking advice before they ‘lend’. Addressing the housing crisis by delivering more affordable homes is key, but we also need to address the shortfall in retirement planning too.”
Securing both you and your family’s future
When you’re considering supporting your family’s future, it’s important to think of the impact it will have on you too. These four tips can support you in the process and help you make the right decision for all involved.
- Seek professional advice to put your mind at ease
Planning your income when you’re in retirement can be a challenge. If you’re worried about how taking a lump sum out of your savings, investments, or own property will affect your lifestyle, seeking professional advice can help.
77% of Bank of Mum and Dad lenders don’t seek any advice before handing the money over, according to Legal and General. Finance professionals can help forecast how your income and lifestyle will be affected by providing financial support. If your heart is saying yes to providing a home deposit, but your head isn’t sure, this step can give you the confidence you need to move forward.
- Decide if it will be a gift or loan
When providing the money for a property deposit you can either gift or loan it. It’s important to decide which it will be early on; it will help both you and your loved one.
Gifting a house deposit is a gesture that will improve the financial security of your family. However, it might not be possible for everyone to do this.
If you have the money for your first-time buyer children to use as a deposit now but will need the money further down the line, a loan can be an alternative. But it’s crucial to discuss this with the recipient.
Firstly, it allows you to set out what your expectations are, including:
- How frequently the payments will be made
- How much the payments will be
- Whether they will pay interest on the loan
- What will happen if they can’t afford to pay
Secondly, it helps your child or grandchild budget their own finances. If they believe the money is a gift, only to find out it’s a loan after taking on a mortgage, it could place a strain on their budget.
- Make the agreement formal
Despite large sums being handed over when you’re backing a property purchase, very few people involve a third party. Research from the Post Office found:
- 15% have a formal agreement about the terms of the loan or gift
- One in four made a verbal agreement only for a loan
- 28% of first-time buyers who use the help of the Bank of Mum and Dad take legal or financial advice
- Only 16% of parents and their adult children formalised their loan agreement using a third party, such as a solicitor
Whether the money will be a gift or loan, making the agreement formal can help ensure that everyone is on the same page. The process can also help clear up any confusion about how the money will be used and how it’s being given.
Another area to think about is whom you’re lending the money too. If your child is moving in with their partner, what will happen to the money you lend should they break-up in the future? A formal agreement can make it clear who the money is for and what would happen in these circumstances.
- Explore other options
If you want to help but are worried about the implications of giving your children or grandchildren a lump sum, there are other options. Lenders have recognised there’s a need for mortgage products that are suitable for first-time buyers. As a result, there are products on the market for those with little or no deposit.
Some lenders may offer a 100% mortgage if a homeowner acts as a guarantor. Another alternative is putting cash into a savings account that is ring-fenced for a defined period of time. These options do come with risks. For example, if your loved ones were to default on a mortgage payment you may be left facing a bill.
If you want to help your children or grandchildren take a step on the property ladder, it’s normal to worry about your decision. Whether you want to give a lump sum, lend a deposit or explore one of the other options, we can give you the confidence you need to move forward.