Parents expected to be involved in 25 per cent of all mortgage transactions for first time buyers in 2016, lending a staggering £5 billion a year
New research by Legal and General, and the Centre for Economics & Business shows that parents, grandparents and friends are set to help finance an incredible 25 per cent of UK property transactions during 2016. On average the Bank of Mum and Dad will help contribute to over 300,000 home purchases, at an average £17,500 each. This makes the so-called Bank of Mum and Dad a top 10 mortgage lender in the UK, loaning a total of more than £5 billion.
To put this into prospective, the UK’s tenth largest mortgage, the Clydesdale Bank lent £5 billion in gross lending in 2014, whilst Virgin Money lent £5.8 billion. It is clear that banks and mortgage lenders are becoming more flexible, with several mortgage lenders allowing parents (or grandparents) to use their greater financial muscle to underpin their child’s mortgage.
For example, Barclays’ has recently updated their Family Springboard mortgage, heralding the return of the 100 per cent mortgage, the first lender to do so since the crash of Northern Rock at the height of the financial crash. Family Springboard mortgages allows first-timers to buy a property even if they do not have a deposit. Instead, a family “helper” can deposit a sum equivalent to 10 per cent of the purchase price in a Barclays savings account for three years, in return they child or family member can obtain a three-year fixed-rate mortgage at 2.99 per cent.
Other lenders offering 100 per cent mortgages include Aldermore, which will lend up to 100 per cent on its Family Guarantee Mortgage, however, 25 per cent of the loan will be in the form of a charge on the parental property. The three main downsides to the Aldermore deal. Firstly, it is expensive, as a two-year fixed rate is higher than most lenders at 5.48 per cent plus a £1,298 fee. Secondly, parents need to take into account that the charge could last for up to 10 years on their property, so parents need to understand the serious long-term implications, as this guarantee could put their home at risk or delay the sale of their own home. Finally, parents will be jointly liable for the mortgage and the bank will pursue them for any unpaid debt in the event of mortgage arrears.
I can appreciate that parents who are in the financial position to help their children have done for generations, but thanks to the Chancellor of the Exchequer, parents now have to consider the tax implications. Entering into a joint mortgage with your children may result in parents having to pay the new 3 per cent surcharge introduced on April 1 for buy-to-let properties and second homes, potentially adding thousands to the purchase price. Exsiting taxes, such as capital gains tax could also have implications for parents when the property is sold.
Some lenders have already moved to counter this tax liability with common-sense being applied. Barclays and Metro Bank allow a parent to be a joint name on the mortgage but with only the child’s name on the property title, avoiding the aforementioned tax liabilities
Nigel Wilson, CEO of Legal & General, said: “The Bank of Mum and Dad plays an increasingly vital role in helping young people take their early steps on the housing ladder.
“But the generosity being displayed by UK families doesn’t make up for intergenerational unfairness – younger people today don’t have the advantages the baby-boomers had, including cheap housing that delivered windfall gains. People will always want to help family members – it is a natural thing to do. Relying so heavily on the Bank of Mum and Dad however risks increasing inequality as many young people today are not lucky enough to be able to access parental support when buying a home, or can’t afford to buy even with parental help.
“We have a supply-side problem in housing – we are simply not building enough houses. We need to build more, especially as the Bank of Mum and Dad could soon start to experience a funding crisis of its own.”
Largest mortgage lenders by gross lending
|Rank 2014||Rank 2013||Name of group||2014 £bn||2014 Estimated market share||2013 £bn||2013 Estimated market share|
|1||(1)||Lloyds Banking Group||40.3||19.8%||35.5||20.0%|
|3||(2)||Nationwide Building Society||26.9||13.2%||26.9||15.1%|
|5||(6)||The Royal Bank of Scotland||19.7||9.7%||14.3||8.0%|
|7||(7)||Yorkshire Building Society||7.6||3.7%||6.8||3.8%|
|8||(8)||Coventry Building Society||7.4||3.6%||5.9||3.3%|
Breakdown by region in the number of supported transactions
|Region||Number of supported transactions|
|Yorkshire and the Humber||21,393|
|East of England||47,256|
Providing that step-up onto the property ladder by parents also carries other risks. You must never overstretch yourself financially, or lend money you could not afford to be repaid. Ensure you look at the best tax-efficient way to lend money, whilst at the same time having safeguards in place in the event of a relationship break-down. If you wish to make it a formal loan be aware that most lenders will look upon this as an interest in the property and would be less likely to approve a mortgage.
Nigel Wilson concludes: “If we are ever to end or reduce our reliance on the Bank of Mum and Dad (and Government initiatives such as Help to Buy 2) we need a new innovative approach to housing. Helping first-time buyers is necessary – but not the whole solution.
“We need to modernise housebuilding and make it more efficient so that we can increase supply and quality for all forms of tenure, and all income and age groups, from students to pensioners. Institutions like Legal & General can regenerate not just residential housing, but the towns and cities in which the homes are built. Infrastructure, jobs and local economic growth are all key to creating thriving communities where people want to live.”
Independent property expert Louisa Fletcher says she can only see the “Bank of Mum and Dad growing in stature as one of the biggest lenders”.