The Bank of Mum and Dad vs. soaring house prices

The so-called ‘Bank of Mum and Dad’ is undoubtedly still a major player in the property market; however, shocking figures have revealed that over a quarter of those aged between 55 and 64 are accepting a lower standard of living in order to help their offspring onto the property ladder.

But with so many of us balancing the ambitions of younger loved ones with our own retirement goals, is there an alternative to handing over an enormous lump sum?

Worrying statistics

As parents, we aim to give our children a comfortable upbringing and a secure future. From funding essential items through to being proverbial taxi drivers for our younger children, this help often extends to giving older offspring a step up onto the property market. As house prices soar, the average deposit contribution is currently £18,000 – a big lump sum to pay in one go. No wonder parents are feeling the pinch!

In fact, a recent study by Legal & General and the Centre for Economics and Business Research [1] found that one in 10 parents and grandparents said they felt less financially secure as a result of digging deep into their pension pots to provide financial assistance to loved ones, and 4% have actually postponed their retirement so that they are able to fund the loans.

Helping hands

More and more young people are turning to their parents for help in getting onto that all-important first rung of the property ladder. 73,000 property transactions this year will be funded by parents cashing in their pension pots or using their annuity income. Another 44,000 will release equity from their home and a fifth of parents stumping up cash for their children’s deposit will downsize their own home to do it.

Parents are even using equity release to help the housing needs of younger family members. Nearly 44,000 housing transactions have been partly or wholly supported by equity release this year, while a fifth of parents lending cash for their kids’ deposit have downsized their own home to do it. The Bank of Mum and Dad is expected to be the equivalent of a £5.7 billion mortgage lender this year, responsible for more than one in four UK housing transactions.

Alternative approaches

One of the most concerning statistics from the survey revealed that more than three-quarters of those asked did not speak to a professional adviser or even seek information online before offering help. But with so many pitfalls to avoid and finer tax issues to consider, it’s always a good idea to take financial advice. That way, you can ensure that you can help loved ones without putting your own financial security and retirement comfort at risk.

While dipping into your savings may seem tempting, there are other ways to help a child onto the housing ladder in order to avoid sacrificing your own standard of living. For instance, relatives may be able to apply for a joint mortgage with a child, or ring-fence invested capital in an account, which can help to reduce the child’s monthly mortgage repayments. As such, benefactors can stay invested and continue to plan for their own future, while providing mortgage assistance to their young relative. There are also specialist mortgages for which the parent is the guarantor of the loan or their income is included in the assessment when a lender decides how much to lend, or mortgages where part of the loan is secured on the parents’ property.

Striking the right balance

Saving for retirement has never been so important, and without a long-term financial plan, we run the risk of outliving our savings. This issue is becoming more prevalent for those who are helping their children enter the property market, while risking being short of funds themselves. Here at Wellesley we can help you find the right balance between helping your loved ones and also ensuring you have a comfortable retirement. By taking the best possible care of your financial needs, you and your children can enjoy a financially secure future.

For more information

If you have a question about how best to help children get onto the property market or would like more information about our services, please contact Wellesley Wealth Advisory on 01444 244551 or via email at info@wellesleywa.co.uk.

[1] The research was compiled using original survey data as well as existing data sources relating to transaction levels. The survey work was carried out by YouGov and Censuswide. For the borrowers the total sample size was 1,002 adults. Fieldwork was undertaken between 5th and 11th April 2018. For the lenders, total sample size was 2,010 adults. Fieldwork was undertaken between 22nd February and 6th March 2018.
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