The Bank of Mum and Dad

by Mark Johnston

First time buyer numbers have dropped over the past few years, as they have been forced out of the market by high house prices, low or non-existent salary increases and unwillingness from lenders to provide high loan to value (LTV) mortgages. However according to government figures, despite recent monthly falls in house prices, the property market is still stubbornly out of reach for most first time buyers.

In today’s market most lenders typically demand deposits of 20 to 40% making most homes out of reach for first time buyers, as there are very few properties on the market for less than £150,000, which would require a massive £50,000 deposit. Therefore leaving some first time buyers with no other option than the bank of mum and dad.

Sarah Garrett of first time buyers magazine, suggest lenders are “strangling the market” but many parents are opting to invest via their children rather than leaving their money in banks.

Parents have helped their children get on to the property ladder for years, although with the mortgage market as difficult as it is today, it means that this help has never been so important.

Jeff Cohen of Winksworth suggested that while last year it was common to see parent accompany their children on a third property viewing, it is now much more common for them to be there on first or second viewings.

Many see the bank of mum and dad as parental generosity, but with the bank of England base rate currently at 0.5%, many parents view helping out their children on to the property ladder as a shrewd investment.

Scottish Widows conducted a recent survey which found that over 50% of the 20.7 million parents with children over 16 had given or loaned an average of £11,776. These figures show that the amount given to children by their parents increased from 67 billion last year to £72.5 billion.

A study by Heartwood Wealth management, an independent financial adviser found that presently one in three parents (approximately 10 million people) intend to help their children enter the property market. Already more than 150,000 parents have given their offspring in excess of £100,000 towards buying a home.

David Hollingworth of mortgage brokers London and Country suggests that while there are deals now available for first time buyers with a deposit of 5-10% the best rates are still offered to those who can put down more of a deposit.

Some are however cautious over giving large sums of money for a deposit, especially when a child is buying with a partner and they fear the relationship could break up.

There are also other serious implications for parents to consider when going down this loan route especially for parents relying on loan payments from their children to help fund their retirement.

Head of financial planning at Hargreaves Lansdown, Danny Cox suggests that any parent reliant on loan repayments to supplement their retirement income should look into some kind of protection plan and get some proper legal advice.

In conclusion it seems in today’s financial climate a parent’s financial responsibility no longer stop after university. With proper costing up to the times a first time buyer’s salary, rather than three times their salary a generation ago, the bank of mum and dad is once again open for business.

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