With Sue Ovens from Precision Financial
Your home may be repossessed if you do not keep up repayments on your mortgage.
If you are a parent then chances are you will have either heard of, or been ‘The Bank of Mum and Dad’. But do you know what the term actually means? If you look it up in the Oxford Online dictionary they offer the following description: (especially in the context of property purchase) a person’s parents regarded as a source of financial assistance or support.
‘They face a lifetime of renting unless the Bank of Mum and Dad is willing to help out’
When house hunting back in the eighties, it was possible to purchase a three bedroom house for around £24,000, which is exactly what I did. With no deposit required I managed to secure a full 100% mortgage with ease. These days however, things are very different; the average cost of a three bedroom house in the UK is now in the region of £273,000 with deposits of up to 20% required.
To get a better deal on mortgages it makes sense to pay as bigger deposit as you afford, with a recommended deposit of 25-30% certainly beneficial (2). However, with rising costs and lower wages it is now virtually impossible for many people in their 20’s-30’s to get on the ladder without financial assistance from their parents.
Nearly half of the 30 somethings I have spoken recently are renting as they are unable to afford the hefty deposits required to buy a property, these people are often called ‘generation rent’. Not all parents, especially those working and earning a minimum wage are in a position to assist children financially, whilst the other half have secured mortgages with the help of their parents.
Some of the people I spoke to had been gifted the money from their parents or inherited money from grandparents which didn’t impact on the parents savings. Others borrowed the initial money from the ‘Bank of Mum and Dad’, then applied for a home improvement loan to pay them back after securing the property. Others I have spoken to had received part gifts and part loan as a verbal agreement with their parents.
A 2017 report on the Bank of Mum and Dad from Legal & General (3) states that parents will be lending in the region of £5 billion to assist their children to buy homes which is a 30% increase on the previous year, so the trend is definitely on the rise.
The good news from that trend is that mortgage lenders have recognised this increasing trend in the market and are starting to design products specifically aimed at parents and also grandparents. These offer alternative ways to be able to help their offspring climb the property ladder. One such option is a guarantor mortgage where the parents use the equity in their own property as collateral towards their child’s mortgage without having to fork out cash, however the main pitfall here is that if the child can’t pay the mortgage for any reason the parent would be liable for the shortfall and in extreme circumstances their home could be repossessed.
There are other options available although it is always advisable to speak to an impartial mortgage adviser before taking any of these alternative options to ensure you are fully aware of what is involved. Read about our mortgage services here.