Bank of Mum and Dad

Make sure you can afford it and understand any tax implications

Parents have always supported their children in lots of different ways. These days, growing numbers of parents see their adult children struggling to build up enough in savings to put down the deposit on a house or to afford to move up from a first home to something larger – but does this mean parents should help financially?

New research shows that the Bank of Mum and Dad will be a driving force behind the recovery of Britain’s housing market as buyers struggle with the economic impact of COVID-19[1]. Nearly one in four housing transactions (23%) will have been backed by the Bank of Mum and Dad in 2020, with a quarter (24%) of borrowers now more reliant on financial support from family and friends.

Total property transactions

Mirroring the impact of the lockdown on the UK housing market, it is forecast that the Bank of Mum and Dad will lend £3.5bn to loved ones this year – which is almost half the £6.3bn that parents, grandparents, other family and friends lent in 2019. As a result it will lead to the funding of 85,000 fewer home purchases.

The figures reflect the effective closure of the housing market under the COVID-19 induced lockdown and a wider collapse in purchases reported by HM Revenue & Customs, with total property transactions similarly falling by nearly half in Q2 2020. Despite this, the Bank of Mum and Dad will still be involved in 175,000 housing transactions, with an estimated transaction value of £50.3bn, this year.

Make sure you can afford it

The Bank of Mum and Dad is set to be a key element in the driving force behind the housing sector’s recovery, as thousands of buyers press ahead with their plans to buy. Last year, 19% of all home purchases were funded wholly or partly by the Bank of Mum and Dad. In 2020 that figure is set to rise to nearly a quarter (23%). Of those who’ve bought recently and received support from family and friends, 65% said it would have been ‘unlikely’ without help from the Bank of Mum and Dad.

If you do decide to act as the Bank of Mum and Dad, it’s important to make sure you can afford it. If you’re using your pension and savings to help out, consider what impact that will have on your own retirement. It’s also important to make sure it’s clear whether the money is a gift or a loan, as this will have different tax implications. If your child is moving in with a partner, you may want a say in how the rights to the property will be held should the relationship break down at some point.

Facing the economic implications

One in five (19%) expect they would have had to delay their purchase by more than five years without Bank of Mum and Dad support, and a further 14% said they never would have been able to buy without the help of family or friends.

The figures come as buyers face the economic implications of the pandemic and a restriction in the choice of high loan-to-value (LTV) mortgages on which many buyers (especially first-time buyers) rely. Data from Moneyfacts has shown a fall in the number of 90% LTV mortgages on the market which allow people to buy with just a 10% deposit.

Property market activity

Despite the Stamp Duty holiday for purchases under £500,000, just 8% of would-be purchasers say they are less reliant on family or friends for financial support as a result of the policy measures introduced to mitigate the effects of the coronavirus crisis. Only 12% have brought forward their plans to buy since the start of the pandemic.

If ‘Build, Build, Build’ is how we will recover from COVID-19, then the Bank of Mum and Dad will be centre stage once more. Generous parents, grandparents, family members and friends are gifting thousands towards deposits, with the Bank of Mum and Dad outpacing even the Stamp Duty cuts designed to stimulate property market activity.

Uncertain economic future

For years buyers have been faced with a limited supply of affordable homes. A challenge which is now being compounded by COVID-19. Not only are buyers facing an uncertain economic future, but changes by lenders in the wake of the pandemic have restricted the low-deposit mortgage options on which many young people rely to make their first step.

While the Bank of Mum and Dad is helping those lucky enough to have their backing, a generation of hopeful buyers without the support of the Bank of Mum and Dad could find themselves locked out of the housing market.

How can I help my children buy their first property?

An important issue to be aware of is how the mortgage lender will treat the deposit if it is described as a loan rather than a gift. If the money is a loan, then the lender must factor this into their affordability calculations and so may lend less as a result. Also, don’t forget the sum of money handed over may not be needed now, but what happens if life subsequently becomes a bit of a struggle? Speak to Reeves Financial on 01403 333145 or email areeves@reevesfinancial.co.uk to discuss your options.

Source data:

[1] https://www.legalandgeneral.com/bank-of-mum-and-dad/

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