The Growing Bank of Mum and Dad
£6.3 billion. According to a new report by Legal and General, that is the amount the Bank of Mum and Dad (BoMaD) will provide to children in 2019 towards house purchases. This would effectively make BoMaD one of the largest mortgage providers in the UK.
Amazingly, almost 1 in 5 of all property purchases - and about 2 in 5 in London – have been made with the assistance of this bank[1]. The total amount funded increased about 10% over the last year, despite the number of property transactions falling. The average contribution has increased to a sizeable £24,100.
Given the problems facing the UK’s housing market, we can expect the calls on BoMaD to continue for the foreseeable future. Indeed 1 in 3 (35%) of all prospective house buyers expect to receive help. But what does this mean for the parents and grandparents providing this funding?
Impact
The majority of the money provided is gifted; 59% outright with a further 14% as a combination of gifts and loans. Only 6% of the recipients were charged any interest. With so much capital, and almost all return, given up, what is the impact on those lending?
The report commissioned a survey of BoMaD lenders to understand more about its nature and impact. It found that:
26% are not confident they will have enough to live on in retirement
15% said they have had to accept a lower standard of living
11% feel less financially secure
6% of lenders have had to postpone their retirement
This immediately makes us ask, were these decisions carefully considered and their impacts understood? Were they planned for in advance?
Helping future generations with house deposits is often an objective of our clients. Their financial plans help them see the impact of these objectives, any trade-offs involved and allow them to make confident, informed decisions. Some are able to give more than originally thought, others less.
Funding
There are usually many options for how property assistance can be funded. The chart below shows the sources of funds used by BoMaD lenders:
If we categorise these, we can see that; 87% consumed some savings and investments, 30% accessed property equity, 22% used their pensions and 10% took on additional debt.
The most concerning fact is that 10% of respondents haven’t even considered how they are going to raise the funds.
By planning in advance, funding can be provided in the most efficient way. Planning can include considerations such as; tax efficiently accessing capital from assets, making use of available schemes such as Help to Buy or Lifetime ISAs and wider estate and inheritance tax planning.
Conclusions
The structural problems facing the UK housing market are unlikely to be fixed in the short term and affordability will remain stretched in most regions, particularly for younger buyers. As such, the role of BoMaD is unlikely to diminish any time soon.
The best outcomes are unlikely to happen by chance. A wish to help family onto, or up, the property ladder should be considered and weighed-up amongst other objectives.
Total current and future financial resources should then be structured to achieve these objectives in the most effective way possible, taking all financial considerations and options into account.
Advanced planning can allow confident, informed decisions to be made when making such gifts.
[1] Survey of 1,500+ UK adults commissioned by L&G in April 2019, Cebr analysis
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