5 min read

The bank of mum and dad

It’s a marvellous feeling. After all those years of having to live by your parents’ rules, suddenly you have your own freedom. You reach 18, officially becoming an adult, and head out into the wide world, self-sufficient for the first time.

A lady in a red top writing in a notebook with a biro pen.

Standing on your own two feet

If you’re heading to university or college, you’ll probably still rely on the Bank of Mum and Dad to help. Not to mention to also house you during the holidays. Once you’ve graduated and got a job – assuming you can – you’ll be standing on your own two feet.

Although there is then the tricky ‘buying a house’ phase. And 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’.

This probably isn’t the definition parents want to hear, but perhaps it’s best to prepare for the worst.

The housing market

The brutal reality of today’s housing market is that the wealth of many families is tied to their property. As house prices rise higher and higher, far outstripping wage increases, for our children’s generation to become home-owners, they will inevitably need help. There has always been a degree of this. Parents often help with household expenses. And, in London especially, where house prices have been high for so long, many millennials need 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, which often outstripped what they’d have for monthly mortgage repayments. These meant those saving for their first home had less spare income to save toward the deposit. High loan to value mortgages, which generally require at least a 5% deposit, are starting to reappear. But these 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). And 69% of those expected to help their children, planning to give them money. Only about a quarter planned 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. The Bank of Mum and Dad is ongoing.

Changes to the mortgage market

Almost inevitably, one consequence will be a change in the mortgage market. 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 if the borrower’s 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, with children still living at home, should prepare themselves and save in readiness.

Note: Whilst we take care to ensure Talking Finance content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions.