The Bank of Mum and Dad is here to stay, but are we addressing the right issues?
IoD Member and property expert, Kate Faulkner, looks at whether parental loans are the best way to help your children
A recent report from Legal and General suggested that the Bank of Mum and Dad now impacts on one-in-four housing transactions in the UK. And it’s not just first -ime buyers they are helping. According to the report, ’43 per cent of buyers aged 35 to 44 received financial help from family and friends, with more than a quarter (26 per cent) of those aged 45 to 54 still relying on the Bank of Mum and Dad.’
The report asks the question as to whether this ‘is sustainable, or even desirable’. However, I’m not so sure that these are the right questions to ask. Whether the bank of mum and dad are helping their kids onto the ladder, or not, and whether this practice will continue into the future, misses the key questions. They are, can the parents afford it? Do they need to help their children or could government schemes or specialist mortgage products provide the solution; and finally, if money is passed on, is it being passed on in the right way?
Carrying out many 1:1 consultations with consumers, answering queries via radio shows and via my own consumer site www.propertychecklists.co.uk, these are the real Q&As which people need to be asking and know the answer to.
Can the parents afford it?
Although parents may be feeling ‘flush’ after a windfall from inheritance or other financial boost, if they fall sick, lose their job or don’t have enough pension provision this cash may be needed at a later date, so it’s really important before passing on any money to make sure as a parent you definitely have the money to spare.
Do they need to help their kids?
One thing I tend to find is that parents do sometimes agree to give their children money without realising they may not need it. For example, people can save for their first home in a Help to Buy or Lifetime ISA and the government will top this up by 25 per cent when they buy. Gifting money means that they will miss out on this bonus at your expense. Second, this or any deposit can be used to purchase either a Help to Buy new build or if affordability is tight, a property through Shared Ownership where they part buy and part rent. Help to Buy is available on new builds only, so maintenance and energy bills should be low and they can buy with just a 5 per cent deposit, take out a 75% loan-to-value mortgage and be given a free 20% loan by the government for five years.
In addition to these schemes, some lenders also offer schemes that allow you to help one child, then a few years later, help another. For example, Barclay’s Springboard or Lloyd’s Lend a Hand mortgages can both help. However, do make sure you seek advice from an independent mortgage broker to find the right financial solution for you.
Is money being passed on in the best way?
Finally, I find parents tend to pass on the money due to cash they have received, such as an inheritance, retirement or endowment pay-out or indeed when trading down. The problem is they rarely seek the advice they should via an independent financial advisor.
Passing money on to to your children can be a good idea, but only as long as potential tax is mitigated and, if the child has a partner they are or aren’t married to, making sure that if they split the money is not ‘lost’ or retained by the partner who decides to stay in the property.
Whether the Bank of Mum and Dad is a good thing or not, it is set to pass on £6 billion in 2018, so it’s wise to make sure the money is spent wisely and protected from future problems.