Getting onto the property ladder can be a difficult task, so it's no wonder that so many would-be buyers turn to their parents for a bit of financial help. As a result, the Bank of Mum & Dad is turning into a significant lender, with research from Legal & General finding that parents will lend an estimated £5bn this year to help their children get on the ladder.
This £5bn figure equates to deposits for more than 300,000 mortgages, which will be used to purchase homes worth approximately £77bn – and means that the Bank of Mum & Dad will become the equivalent of a top-10 mortgage lender, and will be involved in 25% of all UK property transactions that take place this year.
Parents are making significant individual contributions, too, with the average financial input being £17,500, or 7% of the overall purchase price, which could go a long way towards – or may even completely cover – that all-important deposit. Happily for buyers, over half (57%) of those contributions are gifts, while 18% are loans without interest, and only 5% are the more traditional loan-with-interest arrangement.
"The Bank of Mum & Dad plays an increasingly vital role in helping young people take their early steps on the housing ladder," said Nigel Wilson, CEO of Legal & General, but he argues that this is becoming more of a necessity in the current climate: "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," he explained.
"People will always want to help family members – it is a natural thing to do. Relying so heavily on the Bank of Mum & 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 & Dad could soon start to experience a funding crisis of its own."
While this potential funding crisis isn't anything to worry about in the short term, it has the potential to affect future generations, with 2035 thought to be the tipping point. However, the report pointed out that the regions with the highest and fastest growing house prices will face this problem much sooner, with London already experiencing it: so far this year, London homeowners who received financial assistance got an average of 6.2% of their home's total purchase price from the Bank of Mum & Dad, but this represents 51.0% of the average parental household net wealth in the capital (excluding property).
In the South East, the average family contribution towards a loved one's home is expected to cross the 50% mark in 2025, a threshold that could be breached by 2028 for the East of England. Not only that, but the analysis found that the situation is even worse for families living in a region with lower household wealth but whose children are looking to buy in a more expensive region, with families who live outside London already dedicating an average of 64.1% of their household net wealth to help their loved ones buy a place in the capital.
"Families clearly cannot continue to use all of their net wealth to help their offspring onto the housing ladder without putting their own financial stability at risk," it said in the report, but with house prices continuing to rise, it's becoming an increasingly prevalent issue. "If we are ever to end or reduce our reliance on the Bank of Mum & Dad we need a new innovative approach to housing," concluded Nigel. "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."
Whether you're getting help from the Bank of Mum & Dad or are going it alone, the key to ensuring you can take that first step on the ladder is to find the right mortgage to suit your budget. Check out the top first-time buyer mortgages to get started.
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