Financial matters tend to be a topic that most families steer clear of. However, with house prices at almost unattainable levels and many young people struggling with cash flow, this may now be an unavoidable subject. For those parents who are in a position to help their children financially there are many different options to consider. Depending on the issues that sons or daughters are having, there are a number of ways that parents may be able to help.
The Bank of Mum and Dad
The phrase “Bank of Mum and Dad” used to be scathingly employed to discuss those offspring who never really broke away financially. From parents covering rent payments to those still paying allowances to children in their mid 20s, the Bank of Mum and Dad was previously a bail out for the privileged. Today, however, this has changed. Average property values are around £242,000 while the average wage is roughly £27,000. So, the average person cannot afford the average mortgage, which is a maximum of four times salary. Graduate salaries tend to offer somewhere between £19,000 and £25,000 and many recent university leavers are shouldering huge debt burdens (up to £57,000). As a result, the Bank of Mum and Dad has taken on new importance – it may be the only way that many young people can make any financial progress.
What does the Bank of Mum and Dad look like today?
Parents today spend an average of £18,000 supporting their grown up children in one way or another. This is most often with respect to helping young people to get onto the property ladder. According to Legal & General, in 2018 the Bank of Mum and Dad was the equivalent of a £5.7bn mortgage lender, supporting 27% of buyers. This is an increase on the number of people who received help from friends and family in this way the year before. Research carried out by the Family Building Society found that money given or loaned like this was mostly to help cover the cost of deposits. Around half was for this purpose and the rest to meet the cost of mortgage payments, stamp duty and legal costs. Average parental contributions when it comes to helping children get onto the property ladder are £59,248, rising to £76,290 in London.
The real differences between parents and the bank
While it makes a lot of sense for parents with resources to help children who are struggling, the reality is that this isn’t always done in the most sensible way. For example, there are frequently no written records kept about what has been given or loaned. Legal advice is only taken in around 15% of cases, even where loaning or giving money could affect future financial stability. Key details that a real bank might focus on are often left in doubt. For example, arrangements for repaying any loaned money may simply be casually discussed and the issue of what happens if one or both parents dies is rarely covered. 82% of people lending their children money don’t charge any interest and many don’t expect repayment in the foreseeable future. As a result, some parents go on providing this kind of financial support for years – 58% of respondents to the Family Building Society Survey had been providing support for two years and 43% for three years.
What about parents without the cash flow to help?
Not every family has a spare five figures to help children, whether that’s to get on the housing ladder or not. As a result, many parents look for other ways to provide some sort of financial support. Being a guarantor is one of the most obvious options for parents who may be financially comfortable but not wish to give or loan cash to adult children. When it comes to buying property, high deposits and new rules on affordability have made in tough for many young people to get past lender criteria – having a guarantor can help. For example, a grown up child looking to get onto the property ladder with a £30,000 income and no other commitments could borrow up to £180,000 with a parent guarantor earning at least £45,000. Without that guarantor the same buyer would only be able to borrow a maximum of £120,000.
For parents looking to help by acting as a guarantor, whether that’s for a mortgage or a different type of loan, there are a number of things to consider:
- Any lender will want to see evidence that the guarantor is able to step into the borrower’s shoes if necessary. That may mean providing proof of income or other assets.
- Some children run into real financial trouble. Parents may be left to pick up the borrowing tab, which can be devastating financially.
- There may be limits on who can act as a guarantor. Increasingly, lenders won’t accept those who are no longer earning or people over the age of 70.
- Anyone living abroad is unlikely to be accepted as a guarantor. So, parents who have retired overseas won’t be able to help.
- Signing up to a guarantor mortgage could put restrictions on parents’ future financial decisions. For example, parent guarantors who want to buy a bigger house in the future may find themselves unable to do so because of a guarantor mortgage.
- Older parental guarantors may mean shorter mortgage terms. No matter what the age of the borrower, if the guarantor parent is older, a lender may put restrictions on the lending terms.
How to manage the Bank of Mum and Dad
For any families going down this route it’s important to set some ground rules, including:
- Creating a formal written agreement that sets out exactly what is being provided and stating whether the money is a gift or a loan
- Creating a clear schedule of repayments if the money is being loaned
- Working out what happens if one or both of the parents die after money has been transferred
- Defining whether any interest is payable
- Setting out what happens to the interests of any other children
- Explaining what happens to money given or loaned if the parents split up
Other ways for parents to help in the short or long term
Many young people today might need help financially to get past obstacles such as a low starting salary or a lack of savings. If giving or loaning money is not an option there are other ways that parents can help:
- Equity release. This is an increasingly popular option for parents who want to provide cash to adult children without touching retirement savings. Between 2011 and 2017, the market for equity release grew from £789mn to £3.06bn. Many parents view this as simply providing inheritance early but it’s important to take financial advice to ensure that applicable interest and fees are properly understood.
- Letting children move back home. It doesn’t cost anything to offer an adult child the opportunity to move home and save for a deposit while living rent free. However, it’s worth noting that relationships may need renegotiating when families are under one roof again as adults. Plus, it’s important to set savings targets so that children don’t get too used to home comforts and having all their washing done for them.
- Acting as a financial advisor. Learning how to manage finances can be a process of making mistakes and (hopefully) being able to fix them. None of us are really taught how to do this well. Parents can provide financial support to children who are struggling by helping them to retake control of their finances. That might be teaching budgeting skills or creating a plan for getting out of debt.
- Standing as guarantor for a loan. If it’s a short term cash fix that an adult child requires, there are a number of lenders who will be more willing to provide finance where there is a guarantor. Key to this will be understanding what the borrowing is for. It’s also crucial that any parent standing as a guarantor has the resources to make the repayments on a loan and won’t find themselves in financial hardship if the original borrower cannot make repayments.
- Supporting a new business. For parents who are more willing to provide financial support that will generate income it may be preferable to put cash into an adult child’s business idea. This is a good alternative to approaching a business lender with high interest rates. As parents in this situation will essentially be investors it makes sense to draw up official investor documents and set out formally if any returns are to be received.
- Pre-inheritance gift. There are benefits to making gifts to children before you die that you were planning to include in your Will. For example, anything you gift at least seven years before you die will be free from Inheritance Tax at the time of your death. For parents who don’t want to dip into their own retirement savings this can be a way to solve cash flow problems and improve tax planning.
There are many ways in which parents can help adult children financially today. From standing as a guarantor to providing cash towards a property deposit many people can – and do – step up to help.
- Young people likely to be much less wealthy than their parents
- The UK’s 10th largest mortgage company is the Bank of Mum & Dad
- Getting on the UK property ladder – how to save for a deposit