Is this the end of the Bank of Mum and Dad?
Lending from parents to help their children get on the property ladder will amount to an estimated Â£5bn during this year. The so called Bank of Mum and Dad will help to finance 25 per cent of all mortgages in 2016, and if they were a formal business it would propel them to being a top 10 UK mortgage lender.
However, there are concerns parents are gifting too much money to children for house purchase and potentially leaving themselves short as they enter retirement. And, remember, retirement for the baby boomers will be far longer than previous generations have had, with perhaps care costs taking up a sizable proportion of their incomes.
Indicators are that families are on average contributing over one third of their net wealth toward children’s purchases with the figure being as high as 50 per cent in London. Also it is likely these cash injections from parents, coupled with government initiatives such as help to buy and lifetime ISAs, are actually stoking up housing demand causing house prices to rise further.
If this cycle continues it will mean parents will have to stump up even more money as incomes have only risen at the rate of 1.5% per annum since the financial crisis.
Clearly this state of affairs cannot continue indefinitely and I don’t believe it is fair for some parents to have to give up such a large chunk of their wealth that they may need in future. Also it is unfair on people who do not have access to the Bank of Mum and Dad, who may have higher than average incomes but can not access the housing market due to the high deposits required.
Therefore a scheme Barclays Bank has recently launched is a step in the right direction. They will allow borrowers up to 5.5 times incomes and will offer loans up to 100 per cent, but they do require a family member to deposit 10 per cent of the property price in a Barclays saving account for a minimum of three years. Affordability underwriting will be rigorous and Barclays has the saving cushion of 10 per cent family savings that overall lessen the risk for them.
This move by Barclays could also finally herald the end of the Bank of Mum and Dad as a significant mortgage player. This is because providing the mortgage is conducted in a satisfactory manner the family get their money back after three years, and they get a very good rate of return of two per cent per annum.