4th October 2016The ‘Bank of Mum and Dad’ – is it set to go overdrawn?

The problems young people face getting onto the housing ladder are well documented. Ever since the introduction of the Mortgage Market Review in 2014, stricter mortgage criteria have been applied by lenders. In order to be able to get a good mortgage deal, borrowers need to have their finances in order, show that they can comfortably afford their repayments, and be able to put down a sizeable deposit.

With many in their twenties and thirties already paying off student loans, saving enough for a deposit is often an up-hill struggle. To make matters worse, average wages are way out of sync with house prices, and there’s a shortage of property in the first-time buyer price range.

Gifting not once but twice
In what can be seen as a sign of the times, research from Legal & General and the Centre for Economics and Business Research shows that the ‘Bank of Mum and Dad’ is on track to lend over £5bn in 2016. This makes it figure in the top ten of UK mortgage lenders.

Around one in four mortgages are now part-funded by parents, with the amount provided on average £17,500 or around 7% of the average purchase price of a property.

The same study shows that 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 a further £22,000.

A fine balancing act
If house prices continue to rise, wages stay more or less static, and housing demand outstrips supply, older people wanting to support their family onto the property ladder could face some hard financial choices. With life expectancy rising – the number of Britons over the age of 90 has almost tripled since the early 1980s – many parents are set to spend several decades in retirement and will need to ensure they don’t leave themselves short of money by being over-generous to their children.

It’s estimated that one in four people will, at some point, require care or support in their old age to make their lives easier and more comfortable. A recent article in the Sunday Times highlighted the rising cost of care, showing that for a year in an average care home, fees are likely to be in the region of £40,000. If specialist nursing care is needed, it’s not uncommon to be quoted a figure of £1,000 a week.

Avoiding a potential tax bill
Whilst parents understandably want to help their children in whatever way they can, they also need to be aware that giving money away at the right time or in the wrong way could result in their children or grandchildren facing a hefty tax bill at a later date. Careful planning and the utilisation of annual allowances can help ensure that gifts are made as tax-efficiently as possible.

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