The Bank Of Mum And DadWritten on September 14, 2016 by Kirk Rice LLP
In what can be seen as a sign of the times, research from Legal & General* shows that the well-known and closer-to-home source of easier borrowing, the ‘Bank of Mum and Dad’ is on track to lend over £5bn in 2016. This makes it rank in the top ten of UK mortgage lenders.
Their survey shows that first-time buyers are frequently turning to family and friends to provide cash for their all-important deposit, with 25% of all property transactions estimated to need this type of financial support to go ahead, accounting for over 300,000 mortgages on homes worth £77bn.
Sizeable Contributions
The amount provided by parents and grandparents is on average £17,500 or around 7% of the average purchase price of a property. Contributions are often in the form of interest free loans, with 18% made this way. 57% receive the cash as an outright gift. Only 5% of loans are to be repaid with interest.
Lloyds Bank** has carried out research that shows that this form of parental contribution doesn’t stop after the purchase of the first property. It estimates that almost one in five ‘second steppers’ return to the ‘Bank of Mum and Dad’ when they want to move up the housing ladder, typically asking for more than £22,000.
Intergenerational Fairness
Some commentators fear that if prices continue to rise and more is borrowed from the ‘Bank of Mum and Dad’, then it could face a funding crisis of its own.
Giving away cash to children for a property purchase needs careful consideration; by making large gifts of cash parents could be risking their own standard of living in retirement and there could be inheritance tax implications.
In addition, this form of lending risks creating widespread housing inequality as many young people aren’t lucky enough to be able to borrow from their parents and look destined to rent for years to come.
* Legal & General, May 2016
** Lloyds Bank, Second steppers still need ‘Bank of Mum and Dad, October 2015
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
Any reader interested in discussing this topic further should telephone Graham Jennings in our Ascot office on 01344 875000 or email peter.sharratt@kirkrice.co.uk or michael.powell@kirkrice.co.uk or call 01344875000
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