Building your Tembo Plan
The Bank of Mum and Dad. Everything you need to know.
1. What is the Bank of Mum and Dad?
The Bank of Mum and Dad isn’t a real bank, obviously. It describes the financial help many parents give their children to get on the housing ladder.
With house prices rising by as much as 10% a year many younger homebuyers are being priced out. Often the problem is not that they can’t afford the repayments, but that they struggle to save the deposit.
If you’re at an early stage of your career and earning power, building a big enough deposit is especially hard if you also have to pay high rent while you save.
Why the Bank of Mum and Dad can save you tens of thousands of pounds
Let's compare paying a mortgage to paying rent
Comparison of accumulative rent and mortgage (total interest paid) expenses over a 25 year period
Mortgage Required: £200,000
Repayment Period: 25 years
Interest Rate: 3.00%
Monthly Rent: £900
After 25 years if you were still renting you would have paid £270,000 to your landlord.
But if you had bought your own home, you would have paid only £84,527 in interest to the bank, and you would now own your own home.
To avoid their children paying thousands of pounds in rent to a landlord while they scrape together a deposit (money that could be paying off their own mortgage and building up equity in their own home), many parents are stepping in by providing homebuying cash as the Bank of Mum and Dad.
2. What are the key stats for the Bank of Mum and Dad?
Think you’ll be the odd one out getting help from the Bank of Mum and Dad? Guess again.
If you are aged under 35 years, more than half (56%) of your friends are likely to have been given a leg up onto the property ladder by a financial gift or loan from their parents.
That’s according to Legal & General, who do a big survey into the Bank of Mum and Dad every year. In 2020, it found:
- 1 in every 2 first time homebuyers aged under 35 used a financial gift
- 71% said they couldn’t have bought without that financial support (instead, they would have had to delay buying by an average of 4 years)
- BoMaD ‘lenders’ helped 73,160 property purchases among those aged under 35
A third (33%) of all those looking to buy in the next five years plan on getting financial help from family or friends, according to the same report.
And it is not just Gen Z who need a bit of a leg up. The Bank of Mum and Dad lent £2.14bn to the over 35s last year – 61% of BoMaD’s total lending in 2020.
3. Is it bad to accept housing money help from parents?
This is a normal worry.
Homebuyers thinking about going to the Bank of Mum and Dad for help can feel 1) that buying a first home should be a life step they do independently as adults 2) that their parents won’t have enough to live on by themselves 3) concerned that it could create tensions between siblings or other family members.
It’s important to talk about these issues with your parents. Where they are happy to help, they will be able to reassure you.
Talking to your family about money can be challenging. Check out our blog for advice on how to handle those tricky conversations.
How is the situation different for young adults today?
You may be asking yourself why your parents didn’t need financial help from your grandparents to get on the housing ladder.
Here are the main reasons it’s different for you:
Reason 1: House prices vs salary
The average house in March 2021 cost more than 65 times the average UK home in January 1970 when your parents may have been buying (Office for National Statistics). Over the same time, average weekly wages have risen only 35.8 times higher.
- The average house in the UK now costs £250,000
- Prices have risen 10% in the last 12 months
- The average property price in London is now over half a million pounds
All this makes it much harder for people on average wages to now afford to buy a home of their own than in the 1970s.
Reason 2: Student debt
Back when your parents went to university? = £0
Student loan repayments are capped at 9% above £28,800 – but that is money every month previous generations could put towards saving for a home.
Reason 3: Coronavirus
The pandemic has hit younger people’s incomes more.
Reason 4: Housing supply
House building by local authorities, which tends to be significantly more affordable than private developments, has declined substantially across the UK since your parents and grandparents bought their first home.
- House building by local authorities peaked in the 1940s and 1950s
- In England, the peak was 87% of all homes in 1950
- By the early 1980s council house buildings made up less than 25% of the UK total
Property price increases created by decades of a falling supply of affordable housing have made homeownership harder for you than your parents’ generation.
4. Mythbusting the Bank of Mum and Dad
Is it better to ask my parents for a loan rather than a gift?
A loan gives parents more control over how the money they lend is spent. Obviously, a loan will also need to be paid back, where a gift will not.
But for the child, a BoMaD loan, instead of a gift, is probably not the better option.
Let's meet George
George’s parents want to make him a loan of £50,000 rather than a gift
This is to avoid the money being split in the event of divorce, and to make sure it’s only used to buy a home
But only being loaned the money makes it less secure in the eyes of banks
- This means fewer banks will lend to George, and not on the best terms
- George also finds the loan limits how much lenders will lend him for a mortgage
- This is because George has his parents’ loan repayments as an extra outgoing
- Mortgage lenders take loan repayment into account when judging affordability
If my parents give me the money as a gift, can they tell me which house to buy?
No. In law once a gift is given it is the receiver’s to do with as they wish.
Parents may ask children they are giving a gift to sign a ‘letter of intent, explaining what they will do with the money. But this is not enforceable by law.
I’m not married to my partner, will they be entitled to half the gift if we split?
Drawing up a cohabitation agreement or Living Together Agreement (LTA) can avoid any problems with splitting the gift if the relationship breaks down.
This is a legal document common among unmarried couples. It lays out how any assets will be divided if the couple splits.
5. Where to get advice
For parents wishing to act as the Bank of Mum and Dad, and children receiving loans or gifts, it is important to get professional, independent legal and financial advice.
Homebuyers receiving a gift from BoMaD:
- You must tell your conveyancer (the solicitor handling the legal aspect of a home purchase) some or all of the deposit is a gift
- They, and the lender, will want written proof showing the money is a gift, not a loan
Bank of Mum and Dad:
- A mortgage lender will want to know the gift is from legitimately earned money, so will want to see your bank statements.
- You have no legal claim on a gift once given, or the property it is used to buy.
- Consider drawing up a deed of trust. The solicitor working on the property purchase can do this. In the event of a split with a partner or friend they bought with, your child keeps rights to the financial gift.
- If the money is a loan, create a written agreement; if you need to take legal action in the future to recover the money it will help your claim.
Parents lending or gifting money to their children would be wise to speak to a regulated financial adviser first. They can be extremely useful on:
- how to avoid falling foul of inheritance tax rules
- the best way to take money from a pension without paying extra tax
- whether it is better to use non-pension assets instead to fund the gift
- how to rearrange your investments to avoid losing out due to the gift
Both parents and children may want to write or update their Wills after a financial gift.
For the Bank of Mum and Dad updating their Will is an opportunity to even out the financial gift to one child by apportioning more inheritance later to other children.
Children may also want to write a Will to ensure the gifted money goes back to their parents if they die before them
Often the solicitor who arranged the legal side of the home purchase can write a Will for you too.
6. How to offer support to multiple children
Children will very often be at very different life stages and financial needs. It’s often not possible or desirable to give the same amounts to each child at exactly the same time. But unequal giving can also create tensions among siblings.
- Be honest
Parents should have open and frank conversations with all of their children about their gifting plans, now and in the future
- Write a Will
Parents who can’t afford to give large cash gifts to each of their children now should consider making a Will that evens things out after their death.
Typically estates would automatically be split equally among children. This may give children who received a gift from BoMaD a bigger share of inheritance overall.
Writing a Will is an opportunity to make things more equal once more money is available to do so, through the sale of the parent's assets.
- Fair doesn’t necessarily mean equal
It may not be necessary to give each child exactly the same amount. It may be more useful for parents to try to create parity, giving each what they need at the time.
For example, this could be especially true if the children work in different sectors with wildly different salary expectations.
7. Personal circumstances and what the future holds
Over 55s can now access their pension as freely as they wish, which may be a source of financial help to boost a deposit for a son or daughter. But the pension holders also need that money. It is going to have to pay for everything they need for as long as they live after giving up work.
That may mean it must last for decades, to include paying for everything from:
- Enjoyment, like taking more holidays and pursuing hobbies
- Long term social care
- Home modifications to stay living at home after becoming ill or disabled
- Outstanding mortgage or debts
- General cost of living expenses
It's a really good idea to talk about any planned use of pension that would affect these needs through with a financial adviser first.
Will giving a financial gift to my children trigger be a tax bill?
Adults can give away £3,000 each a year (or £6,000 if they didn’t use last year’s allowance) free of inheritance tax (IHT), which is usually chargeable at 40%.
Also, gifts from surplus income (usually if the giver is still working) are free of IHT, provided they don’t significantly impoverish the giver.
Parents who want to give a bigger gift for a home deposit should be aware of the 7-year rule.
The 7-year rule
This applies to larger gifts. As long as the giver survives for seven years after making the gift it is IHT-free. The 7-year rule is tapered; the closer to the seven-year threshold the giver dies the less IHT the receiver pays.
8. Alternatives to the Bank of Mum and Dad
Spread the value of family savings
A family mortgage lets a parent put some of their savings into a ringfenced account (acting as a deposit) so the homebuyer can get an up to 100% mortgage.
Guarantor mortgages are an agreement between you, your parents, and the lender that if you can’t pay your mortgage the guarantors (your parents, or perhaps grandparents) will pay it on your behalf.
Open a Lifetime ISA
Lifetime ISAs, or LISAs, can be opened by anyone aged 18 to 39. You can save up to £4,000 each year into one and the government adds 25% free. A LISA can only be used for a deposit on a first home or a pension. Withdraw early for any other reason and you’ll face a penalty that will mean you get back less than you put in.
Help to Buy equity loans
These are for new build homes only. The government lends first-time buyers up to 20% of the value of the property (up to 40% in London) interest-free for the first five years.
You buy part of a property and rent the rest from the local authority. You can then buy further chunks (usually in increments of 25%) until you own the property outright. This can be an expensive way to buy as you have to pay costs like legal and valuation fee each time you buy another chunk.
Words by Laura Miller.
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