The bank of mum and dad

Posted in: Finance Last updated: 04 Jun 2013

It’s a marvellous feeling: after all those years of having to live by your parents’ rules, under their roof, within their financial constraints, to then reach 18, officially becoming an adult, and head out into the wide world, self-sufficient for the first time.

Standing on your own two feet

Unless of course, you’re heading to university, or college, in which case, even after you’ve 'maxed out' on your student loan, you’ll probably still be relying on them to help with living expenses and housing you during the holidays. Still, once you’ve graduated and got a job – assuming you can get a job – you’ll finally be standing on your own two feet.

Although there is then the tricky ‘buying a house’ phase, when, let’s be frank, finding tens of thousands of pounds for a deposit is going to be a challenge even for the highest of earners and most ardent of savers.

So here it is: this generation appears doomed to rely on their parents for financial support later and later into their lives. The Bank of Mum and Dad is so prevalent it has an official meaning and an acronym. According to urbandictionary.com, the Bank of Mum and Dad (BoMaD) is defined as ‘money acquired from one’s parents that doesn’t have to be repaid...or the borrower doesn’t intend to repay even if they’re supposed to’. Not sure this is exactly the definition parents want to hear, but perhaps it’s best to prepare for the worst.

The housing market

Because the brutal reality of today’s housing market and financial climate is that the wealth of many families is tied in with the property they own. As house prices rise higher and higher, far outstripping wage increases, for our children’s generation to become home-owners, they will inevitably need our help. There has always been a degree of this going on. My parents helped with some household expenses and, in London especially, where house prices have been high for so long, many people my generation needed some help to get a foot on the ladder. But today it’s less a ‘nice to have’ and more a ‘have to have'.

The facts speak for themselves: average salaries have risen from about £6,000 in 1983 to £26,500 in 2012 (ONS) but during that same period house prices have leapt from £31,600 to £161,400 (Halifax) with an average deposit of almost £28,000 required.

"...finding tens of thousands of pounds for a deposit is going to be a challenge even for the highest of earners and most ardent of savers."

There have been other factors in the housing market working against first-time buyers: after the crash, high loan to value mortgages all but disappeared, so that buyers required more substantial deposits. Then there was a double whammy, high rents – often outstripping what they’d be required to find in monthly mortgage repayments – meant those saving for their first home had less spare income to save toward the deposit. High loan to value mortgages, which generally require a at least a 5% deposit, are starting to reappear but invariably come with higher interest rates.

Research findings

So are parents ready for this almost limitless financial support of their children, involving substantial sums of money that may never be returned? Research conducted for Family Investments found 67% plan to help their children buy a house (about the same proportion as own their own home) with 69% of those expecting to help their children planning to give them money. Only about a quarter plan to lend them money – which they then expect to be paid back.

Yet the quantities involved are substantial: more than half plan to contribute less than £10,000, 8% more than £30,000, and 6% more than £50,000 plus.

So this level of continued financial support requires some planning, whether that be in working longer, eating into their own retirement funds, down-shifting to release capital from their properties, etc. The idea that parents can wash their hands of any financial ties after 18 years now seems ludicrous.

Changes to the mortgage market

Almost inevitably, one consequence will be a change in the mortgage market. As I mentioned above, higher loan-to-value ratio mortgages have started to reappear but so too have equity release plans and guarantor mortgages. The latter works when a parent (or other family member) with equity in their own property acts as a guarantor to someone else (invariably their child). It provides the lender with greater security as the guarantor is responsible should the borrower be unable to meet their repayments.

Opening up the housing market to the next generation is essential for the continuing progress of our nation. No one benefits when the country's wealth is tied up with the retired, while their children struggle to get a foothold on the housing ladder. Yet while this argument is easy to make on a macro level, making those decisions on a micro level is much tougher, especially as uncertainty around the level of state care for the elderly continues.

In the meantime, the generation caught between these two life-stages like myself, with children still living at home, had better prepare themselves and start saving all they can in readiness!

Note: Whilst we take care to ensure Hub content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions. OneFamily do not provide advice so it may be worth speaking to an independent financial advisor about your own circumstances.