In 2018 the Bank of Mum and Dad (BoMaD) will fund around £5.7 billion towards the purchase of 317,000 homes. Statistics show that BoMaD is involved in 1 in every 4 house transactions. This makes BoMaD equivalent to the 9th biggest mortgage lender in the country. (Legal and General ‘Bank of Mum and Dad’, 2018)
The latest research indicates that the millennial generation and upwards are benefiting from their parents’ and grandparents’ wealth. Figures state that 35% of first-time buyers are purchasing homes with help from BoMaD whilst 59% of homeowners under 35 receiving some form of financial assistance from family and friends. The average amount given is £18,000, made as either a loan or financial gift. (Legal and General ‘Bank of Mum and Dad’, 2018)
Yet despite the extensive financial transactions taking place across the UK by BoMaD, more than three quarters (77%) of 'lenders' took no financial advice. In addition, only 15% of transactions are supported by a formal written agreement (Legal and General ‘Bank of Mum and Dad’, 2018). This situation is not ideal given the significant monetary amounts involved.
To help avoid mistakes or misunderstandings, discussing things thoroughly with the family members involved is very important. Getting a financial professional involved early is a good idea, as their guidance could save on money, time and disagreements.
Help for when you have ‘the conversation’
Discussing money with friends and family can be a difficult conversation to have. To help parents or grandparents navigate this new kind of family relationship more effectively, the Post Office has put together a Bank of Mum and Dad Conversation Guide.
The guide will take you through some of the things you need to think about and discuss before any money is handed over. It can help you to set out the terms under which you want to provide the money, avoiding problems later. You can download the guide here.
Bank of Mum and Dad feeling the squeeze
Even though the volume of BoMaD transactions is increasing, the amount being given has decreased recently. In 2017 the average contribution was £21,000. In 2018 so far, the amount has dropped to £18,000, indicating the first signs of strain on Bank of Mum and Dad. Figures show that 71% of ‘lenders’ used cash savings to fund BoMaD contributions, while 20% downsized their homes, and 16% used pension savings or lump sums. As a result, 1 in 5 (17%) of ‘lenders’ have said they have experienced a lower standard of living.
This is where good financial planning can make a difference. If you’re using existing wealth to provide BoMaD funds, then when and where the money is taken from can impact on your overall wealth. Taking financial advice means you will be able to manage any financial impact and minimise tax implications.
The alternative is to forward-plan for the likelihood of becoming a BoMaD lender and build targeted wealth over time. In this case, a financial adviser’s expertise can be crucial to getting the best returns. They will formulate a realistic plan with you, keep you on target, and identify the right investments and tax wrappers. Specific funds will then be available to help the family, with minimal impact on wealth and standard of living.
Other factors also funded by Bank of Mum and Dad
It’s not just property that is being funded in this way. Other financial pay-outs also figure for Bank of Mum and Dad.
University/College – fees can cost parents up to £5,700 per year for students in London (Martin Lewis, 2018). Financial assistance for day to day living, books, food, accommodation etc. can cost around £9,390 per year or more. (Advice from Manchester University to undergraduate students).
Weddings – although only 17% of parents pay for their child’s wedding these days, 51% of couples still get some financial help from family (hitched.co.uk 21st Century Bride survey 2017). With the average cost for a wedding in the UK being £27,161, the sums involved can be large.
Gifts – it appears people are moving away from the idea of a traditional inheritance. Providing money to the younger generation when it’s needed is becoming more popular. Office for National Statistics figures show that inheritance pots left between 2008 and 2010 were reduced by lifetime spending. This is backed up by a 2013 Aviva survey which found that a quarter of over-75s had given a cash loan to family members instead of leaving an inheritance. Cars, gap years, babies and child care are just some of the reasons lump sums are being gifted.
Make sure that your branch of Bank of Mum and Dad is well prepared
With the sustained increases in property prices in recent years, financial assistance by BoMaD looks set to continue. More parents and grandparents are likely to assist youngsters in getting a foot on the property ladder or fund lifestyles.
The question is, how prepared are you for this financial responsibility? Whether you choose to build for the future or use your existing wealth, preparation is the key. Everyone should have a clear idea of what is to be achieved and the best way to go about it.