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Increase in Lending by the “Bank of Mum and Dad”

Posted on 18 May 2017 by Laura Trott

Increase in Lending by the âBank of Mum and Dadâ

In recent years there has been an increase in parents assisting their children as it becomes increasingly more difficult for young people to get on to the property ladder.

According to a study by Legal & General, in 2016 33% of first-time buyers needed help from family member (parents, grandparents…etc) but in 2017 that figure is expected to jump to 42%.

The so-called 'Bank of Mum and Dad' is set to provide £6.5bn this year to help their children buy a home, making it the UK’s 10th biggest lender, on a par with Yorkshire Building Society.

It is expected that parents will be involved in 26% of all property transactions that take place in the UK this year and are expected to provide deposits for more than 298,000 mortgages.

The amount of money from family gifts, loans or inheritance being given is predicted to rise from an average of £17,500 to £21,600.

Millennials are the biggest recipients of funding from the Bank of Mum and Dad, with 79% of the total going to people aged 30 or under.

Legal & General chief executive Nigel Wilson said: "Parents want to help their kids get on in life, and the Bank of Mum and Dad is a testament to their generosity, but it is also a symptom of our broken housing market."
House prices have increased significantly faster than earnings and many young people are leaving university with significant debts after having to pay high tuition fees, so affordability has become increasingly stretched. At the same time, to qualify for the best deals lenders are demanding large deposits from borrowers as well as tightening their affordability criteria meaning lenders are less willing to advance high loan-to-income mortgages.

Parents do need to be wary however. Money given must really be an outright gift rather than a loan so that it does not impact the borrower’s affordability from the lender’s point of view. Parents will usually have to confirm to the lender that they don’t require monthly payments and that the money has been given as an outright gift. If regular repayments are demanded by parents then the lender may cut the mortgage loan being offered.

Parents also need to consider that a gift can be subject to inheritance tax if they do not survive more than seven years after the gift is made.

Lastly, both the parents and the children need to ensure that the correct legal documentation is in place. For example, if a parent provides support to their child and their child’s partner, they may want to protect the gift so if the couple splits is not split between the two parties but is kept by their own child.
 

Posted in: Buying & Selling Your Home