The bank of Mum and Dad is now a major player in the UK economy
Families are forking out money to fund youngsters’ property deposits, university fees and even to cover their everyday living expenses.
However, banking is not a risk-free business as we saw in the financial crisis, and if the Bank of Mum and Dad goes bust, there is nobody to bail them out. Could we be taking intergenerational generosity too far?
Incredibly, the Bank of Mum and Dad will have a stake in one in four of all UK property transactions this year.
They will lend more than £6.5 billion, up from £5 billion last year, helping children to buy almost 300,000 homes worth £75 billion in total, according to Legal & General and the Centre for Economics and Business Research.
This makes them the ninth largest mortgage lender in the UK and they are climbing all the time.
Legal & General chief executive Nigel Wilson says as intergenerational inequality widens, the Bank of Mum and Dad is plugging the gap: “Younger people do not have the same opportunities that the baby-boomers had, including affordable housing, defined benefit pensions and free university education.
The Bank of Mum and Dad now offers an average loan size of £21,600
“Parents want to help their kids get on in life, and the Bank of Mum and Dad is a testament to their generosity.”
Putting yourself first is not something to feel guilty about
It is also testament to our broken housing market, he says, with the UK failing to build enough properties to house the fast-growing population.
The Bank of Mum and Dad now offers an average loan size of £21,600, up from £17,500 last year. The vast majority of this goes to young people under 30, the so-called “millennials”.
If you do not have enough ready cash to help younger family members, there is another option, says David Hollingworth, mortgage broker at London & Country: “The Barclays Family Springboard mortgage lets young buyers take out a mortgage of up to 100 per cent of the property value if parents deposit cash worth 10 per cent of that value in a special savings account.”
The Bank of Mum and Dad will have a stake in one in four of all UK property transactions this year
This cash acts as security for the loan, but also earns a competitive interest rate, a variable 1.75 per cent. Parents can access their money after three years, but Barclays reserves the right to hold on to it if the child has fallen behind with their mortgage repayments.
Hollingworth says Family Springboard offers competitive mortgage rates, starting at 2.79 per cent fixed for three years, while other lenders also support families who do not have plentiful cash: “Bath Building Society, Family Building Society and Aldermore Bank allow parents to use spare equity in their home as collateral for their child’s mortgage.”
Be warned, there is a downside. If the property purchase goes wrong, the parents’ cash or even their home could be at risk.
Barclays, Hinckley & Rugby, Metro Bank, and Bank of Ireland help by allowing parent and child to take out a mortgage in joint names. He adds: “The property title will only be in the child’s name, as otherwise the parent could be liable for a stamp duty surcharge and capital gains tax when the property is sold.”
Again, parents need to be aware of the downside, as these deals could limit their ability to borrow money for any other purpose.
TAKE A STAKE
The Bank of Mum and Dad is steadily expanding its operations into other areas, just like any other financial services player.
Parents now contribute an average of £123.60 a month to their children’s living expenses, doling out nearly £1,500 a year, according to new research from GoCompare.com Money.
They are picking up the tab for everyday items such as food, mobile phones, clothing, cosmetics, car tax, rent and even pub money.
Worryingly, almost a fifth say that supporting children aged 17 to 25 is putting a real strain on their own finances. Many fear their offspring have got too used to having a comfortable lifestyle at somebody else’s expense.
Parents are lending children money for houses, cars and university fees
Matt Sanders, financial expert at GoCompare Money, says more young adults need help as wages stagnate while the cost of necessities such as rent, energy bills and car insurance continues to rise: “Those at the start of their careers have to make their money stretch a lot further than they did in previous years.”
This is upping the financial pressure on parents who continue to pick up the bill when children are earning enough themselves. He adds: “If subsidising your adult children is causing you financial difficulty, it could be time to cut the purse strings.”
SQUEEZED MIDDLE AGE
A third of parents are also paying thousands of pounds a year to keep their own parents afloat, covering care-home fees or everyday bills, according to research from pensions advice specialist Portafina.
Managing director Jamie Smith-Thompson says parents are being squeezed at both ends: “Supporting family whilst juggling your own cash is a challenge for anyone. Putting yourself first is not something to feel guilty about, it is simply common sense.”
The Bank of Mum and Dad is doing some vital work, but needs to prioritise remaining solvent, just like any lender.