by Mark Johnston
With the average first time buyer now already in their early 30s and the dramatic changes in university funding which are and will be leaving potential home owners with substantial debt that preclude saving for the future, the situation can only get worse.
Parents therefore naturally want to help, the last thing they want is their children beholden to a high interest charging, aggressive financial institution that is more interested in its profits than giving fair deals on lending money.
All parents can remember the costs involved in own their first property. Therefore the parental ‘bank’ came in to prominence after the supply of high loan to value (LTV) mortgages suitable for the first time buyer more or less dried up.
The bank of mum and dad will not credit score, send round the bailiffs and generally treat their customers fairly. The main products that the ‘bank of mum and dad’ current offer are:
House deposits: lenders are willing to provide the best interest rates to those buyers with high deposits, which need to be around 20% to stand a chance of getting the best deals.
Guarantor mortgages: within the past year new guarantor mortgages have been developed, parents must guarantee at least 25% of the mortgage debt and provide a charge on their own property.
Guarantor loans: over the last couple of years a new type of loan has been developed by small niche lenders. Unlike the big banks these lenders are lending £10’s of millions instead of £10’s billions to young people whose parents step in and guarantee the repayments.
However the implications of making such generous offers are very complex and often not fully understood until something goes wrong then it can be too late.
Parents considering helping out their children should firstly consider if they are giving them the money outright, if they are loaning them the money and how they intend to retain an interest in their property. Considerations should also be made into what action they would realistically take should they default on their payments.
The average debt reported by the consumer credit counselling service (CCCS) clients was around £22,476, of this at least £3,530 was private debt owed to family and they believe that with the on going credit crunch and general lack of high street lending this could grow further.
These figures however do not show the fact that money is a strange emotional tool, if parents are willing to lend money they must prepare to write off all the money they lend, just in case.
It seems it is not just high street banks that are disappointing many of their customers, the parental bank, which has been a financial lifeline to the younger generation in recent times, is also having to cut back. This is hardly surprising given the squeeze on household incomes from rising food and fuel bills.
Every parent wants to help their children, but mixing love and money can be a dangerous situation.
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