January 9th 2017

Would you believe that ‘The Bank of Mum and Dad’ lent more than £5.3bn to home buyers last year, making it the UK’s tenth largest lender. Mike Ellis delves a little deeper.
Mike Ellis, JRW IFA
With low or no interest rates, personal service and long or infinite repayment periods, it’s little wonder that the ‘Bank of Mum and Dad’ is Britain’s best-loved financial institution. But what you might find surprising is just what a major player it has now become within the UK housing market. New research shows that in 2016, home buyers received more than £5 billion worth of help from their families and friends, making it equivalent to the annual lending of a top-ten mortgage lending business.

This trend has of course been driven by both demand and supply, with years of house price increases  significantly outpacing wage rises, making property less and less affordable for first time buyers. In fact, home ownership is now at its lowest levels in a generation and things are forecast to get even worse, the house price-to-income ratio was at its widest since the financial crisis in 2015 and this is set to peak next year.

For many aspiring homeowners, it is simply impossible to buy a property without help from family and friends. But it is now the baby boomers who control the lion’s share of the countries wealth, as this is the sector who have benefitted from an increase in the value of their homes, good pensions and significant savings, they are in a strong position to help. Research shows that the Bank of Mum and Dad has helped more than 300,000 of their loved ones to get on the property ladder in 2016, giving an average of £17,500 to each to fund the purchase of £77 billion worth of property. This means that the Bank of Mum and Dad were involved in 25% of all mortgage transactions in 2016.

Parents and grandparents have been encouraged to give away their money to millennial relatives who are struggling to buy, as earnings stagnate and house prices continue to increase. In fact a quarter of all home owners, 32% in London and 57% of the under 35’s received help from friends and family to buy the home they live in and that proportion is only set to increase in the future. In 80% of cases, parents are the ones finding the cash, but grandparents represent 10%, with other family members making up the other 10% who are also helping out their loved ones too.

But how long they can continue to do so is open to question with the pace of house price increases  threatening to stretch families finances to breaking point. In 2016, the average family contribution towards a loved one’s home is 37% of an average household’s net financial wealth, excluding property wealth. And by 2035, it is predicted that it will be more than half. The figures do suggest that help from family and friends has been used more often than the Government’s Help to Buy ISA scheme this year.

While more than half a million of the Isa accounts have been opened, Government figures released this week show that the bonuses have been used for just over 38,000 transactions. However, this figure does suggest that the ISA’s are making it easier for younger people to buy. The average age of those collecting their bonuses is 27, compared to the national average first-time buyer age of 30.

The properties bought using the bonuses also cost less on average, at £169,045, compared to a first-time buyer average of £183,000.

The ISA’s have however been criticised for rules that have left some home buyers out of pocket. They can only be used to buy properties worth up to £250,000 outside London and £450,000 inside London. Some who bought shared ownership properties found at the last minute that they were not eligible for the bonus because the total value of their property was more than this, even though the portion they were buying was worth less. The bonus is only available at completion and not exchange, meaning that it can’t be used for the initial deposit, another thorny issue that many buyers only found out about at the last minute.

If you want to help your kids to get onto the property ladder, the first thing you need to work out is whether or not you can you afford it.

You may have savings or investments that you can cash in, or it might be that you need to borrow money against your home to help them out. There are several ways to do this, you could remortgage to release equity in your home but if you don’t want to switch mortgage deals, you could even get a loan secured on your home instead. Older borrowers might be interested in equity release schemes which allow you to borrow money against your home, with the capital and interest repaid after your death or when the property is sold.

If you do decide to borrow money to help your children, it’s a very good idea to get some professional financial advice first. For impartial advice do not hesitate to contact us at JRW Financial Services to discuss the best options for you.

JRW Chartered accountants in Edinburgh, Galashiels, Hawick, Langholm and Peebles.