Recent articles suggest that the Bank of Mum and Dad is now the ninth largest lender in the U.K with parents predicted in 2017 to put in a staggering £6.5 billion to help their children onto the property ladder.
And even more staggering is that this will mark a 30% increase on 2016!
These articles are based on research carried out by Legal & General and economics consultancy Cebr. Full details of the research can be found here. I do recommend that you have a read of it – it makes for very interesting reading.
Just over a quarter of home owners say they received financial help to buy but for the under 35s that rises to 62%.
So what is the Bank of Mum and Dad and why is it playing such an important role in the property market?
What is the Bank of Mum and Dad?
This is the term used to describe money provided to home buyers by family and friends, usually parents (hence the Bank of Mum and Dad) to help their children with their deposit when buying a property and is usually to help first time buyers.
In my experience helping first time buyers in the Edinburgh property market, I can certainly confirm that almost all the first time buyers we help are getting financial assistance from their parents.
But the recent articles seem to indicate that this financial assistance is a mix of loans and gifts, whereas in my experience loans are rare and gifts are the norm. The reason for this is simple: lenders (banks and building societies) who provide mortgages do not like second loans but seem reasonably happy for mum and dad to gift the money to their children.
Where did the Bank of Mum and Dad come from?
It has probably always existed but during the financial crisis which started in 2008, the role of the Bank of Mum and Dad started to become more of a necessity than a helping hand.
Before the banking crisis of 2008, lenders – rightly or wrongly – were prepared to offer home buyers 100% mortgages as a matter of course. But as a result of the financial crisis and its aftermath, the government and banks decided that lenders should be more sensible in their lending and so we went from 100% mortgages down to 80% and we are now at around 90% mortgages for first time buyers but with 95% mortgages also being available.
So we went from a time where first time buyers could get onto the property ladder with no savings or deposit, to having to find a substantial deposit. A deposit they could not hope to save from their wages and so the Bank of Mum and Dad started to fill the gap.
Why is the Bank of Mum and Dad playing such an important role?
I can only explain this in relation to the Edinburgh property market, but in Edinburgh a lot of properties affordable to first time buyers are selling at prices 10% or more above their Home Report values at the moment. Since the amount of the mortgage will be based as a percentage of loan to value and not on the purchase price, it means that the deposit required by first time buyers can often now be more than it was when mortgages were only 80% but properties were selling at less than their value.
I admire all home buyers who manage to save money whilst renting but realistically if you have to save about £20,000 then it is going to take you some time to do so.
And so if mum and Dad can help you with a financial gift, then it makes the dream of owning your first home and getting onto the property ladder just that little bit easier.
Have you heard about the Barclays’ Family Springboard Mortgage?
Whilst researching the Bank of Mum and Dad I came across the Barclays’ Family Springboard Mortgage product which might be of interest. Now, we are not financial advisers and so cannot give financial advice but I thought it worth bringing this to attention.
The mortgage is one where first time buyers and movers can borrow 100% loan to value (ie no deposit required) with Mum and Dad providing a sum equal to 10% of the loan which is invested by Barclays in an interest-earning account that is repaid at the end of 3 years provided the mortgage repayments are kept up to date.
So for Mums and Dads, that might be a more attractive proposition than making an outright gift.