The 'Bank of Mum and Dad’ grows to become a £6.5bn UK Mortgage Lender – on a par with the 9th largest UK lender
The 'Bank of Mum and Dad' continues to grow in importance in helping young people take their early steps onto the housing ladder. Legal & General’s new research on the “Bank of Mum and Dad”, published in conjunction with the Centre for Economics & Business Research (Cebr), underscores the huge role of families in an over-priced, under-supplied housing market.
The research reveals how parents, family and friends will lend over £6.5 billion in 2017, up from £5bn in 2016, providing deposits for over 298,000 mortgages, and helping others to purchase homes worth £75 billion.
The Bank of Mum and Dad (BOMD) is now on a par with the 9th largest mortgage lender in the UK (up from no.10 last year) and will be involved in more than a quarter (26%) of all property transactions that take place in the UK market this year.
Consequently your client’s current financial situation could face very different financial challenges and threats than what could be expected a decade ago. If your clients are aged over 50 and have children, then one of the UK’s toughest “Financial Borrowers” are probably headquartered in their living room, with an expectation not only of emotional but financial support. If on the other hand, the client sitting opposite you is under thirty- five and trying to buy their first home, their “Financial Lenders” may well include their parents, grandparents or even friends, due to their lack of assets.
Bank of Mum and Dad is a growing lender
After another year of rising prices and sluggish wage growth, home ownership is out of reach for ever more prospective buyers, and the Bank of Mum and Dad is busier than ever fighting to change that.
Average Annual House Price Growth in the UK Housing Market
This is the second year of our BOMAD research and the statistics show the problem is worsening. Transaction volumes are down in the housing market but BoMaD funding is growing exponentially. This is not a positive economic model as it may not be sustainable or equitable for both parents (the lenders) and young people (the borrowers).
In 2017 over a quarter of prospective homeowners received financial help to buy from friends and family (26%). In fact, BoMaD assistance has risen from £17,500 in 2016 to £21,600 in 2017 – a jump of 23%. Worryingly, it would seem that this form of financial assistance is considered the norm with over two -fifths (42%) of prospective first time buyers expecting to get some help.
Not surprisingly, millennials are the biggest recipients of this type of financial funding, with nearly four-fifths (79%) of people under 30 receiving these hand-outs. Add in those under 35, and the figure rises to 92%.
While parents remain the biggest source of financial support, the role of other family and friends is growing. In 2016 they accounted for 9% of all assisted home purchases; this year the proportion is 19%.
With so many young people relying on family or friends when buying their current home, advisers need to be highly sensitive to the role of the family unit when it comes to property sales and purchases. As a society we have become more dependent on the older generation to support our housing dreams, and that has the potential to lead to some tough conversations. The role of the intermediary here can be key, supporting and guiding parents who want to help their children while also looking at the issues from the ‘borrower’s’ perspective, who have their heart set on that dream home.
Regional breakdown of financial generosity
Where families help, they can. It’s admirable but does little to address the real problems of the housing market, whether for renters or purchases.
As it is, the help buyers get is something of a lottery: Those in the South West are the least likely to be helped to buy by family and friends (just 19% get support); but those that do receive help get more than anywhere else as a proportion of average house prices in the region: £30,000. As a proportion of regional house prices, meanwhile, the help the Bank of Mum and Dad can provide ranges from as little as 5% of average house prices for those buying in London, to as much as 14% in the North East.
In every case, though, this cash makes a substantial difference: not between those home owners who receive help and those that don’t – the research finds little difference in income, assets or lifestyles between the two; but in enabling recipients to join the ranks of home ownership, which look increasingly out of reach for those that can’t afford a deposit and can’t get help. In fact, more than two thirds (69%) who received help say they couldn’t have afforded to buy without it.
So what does that mean for Intermediaries?
For now, the Bank of Mum and Dad (and Grandma and Grandpa) appears well-capitalised – and we believe there is a clear opportunity for advisers to help the older generation understand how best to use their available resources both for themselves and their loved ones.
The Bank of Mum and Dad is a caring bank, and will generally try to do more. We’d expect the small minority – just 3% - using equity release to grow in coming years as families stretch their resources to help their loved ones onto the property ladder. Therefore both parties – the lender and borrower need to be financially protected before committing to such a significant monetary obligation.
Advisers therefore need to make sure the right balance is found between parents and family members helping children buy their first home and their own financial security. Protection levels may need to be reviewed – both life and critical illness - and any later-life lending or gifts will impact on income and tax planning. For the children, areas like home and contents insurance, life insurance and critical illness cover will be vital as they make the leap from ‘Generation Rent’ to becoming a homeowner.
Read the full report here