It’s official. The so-called Bank of Mum and Dad (BOMAD) is now large enough to rival a top-10 mortgage lender. Parents are set to hand over an estimated £5bn to their children in 2016 to help them buy property, according to research by insurer Legal & General (L&G) and the Centre for Economics and Business Research (Cebr).
The research described the BOMAD as a “major player” among mortgage lenders and revealed that parents’ money will be involved in a quarter of all property transactions in the UK this year.
The study was published in the same week that Barclays Bank introduced a 100% mortgage. The Financial Times reported that, under the terms of the mortgage, a family member or guardian will need to put aside 10% of the purchase price in cash for three years in return for interest, as long as the borrower keeps up with repayments. Most banks require 5%–10% deposit.
Findings from the study have triggered discussion about the increasing cost and shortage of housing in certain parts of the UK, particularly London, and the intergenerational effect that parents’ money will have on the housing market.
Intergenerational unfairnessIn an article for Business Insider, Oscar Williams-Grut lays out the key findings of the study. These include quite startling statistics, such as:
- 57% of under-35s have had help from friends and family in buying their house.
- Parents will help an estimated 305,900 people fund property deals this year
- Loans from parents will help fund the purchase of £77bn worth of property this year.
57%
The proportion of under-35s who have had help from friends and family when buying a houseWilliams-Grut unabashedly concludes from the figures: “You need rich parents to be in with a chance of getting on the property ladder.”
Digging deeper into the study, he highlights one “particularly depressing snippet”. According to L&G and Cebr: “Home ownership is at its lowest levels in a generation, and things are only going to get worse. In 2015, the house price-to-income ratio was at its widest since the financial crisis. Cebr forecasts it will pass its 2007 peak within two years.”
Quoted in the article is L&G CEO Nigel Wilson, who goes some way to explain the rise in reliance on parents. “Younger people today don’t have the advantages the baby boomers had, including cheap housing that delivered windfall gains.
“The generosity being displayed by UK families doesn’t make up for intergenerational unfairness,” he says.
Business Insider article
Spiralling house pricesWriting for the International Business Times, Shane Croucher looks at how the BOMAD compares with leading mortgage lenders.
He cites figures from the most recent (2014) data from the Council of Mortgage Lenders that suggest the BOMAD would fall somewhere between ninth and tenth place, with its lending of over £5bn. “Clydesdale Bank [was] the tenth-largest lender after loaning £5bn ... In ninth place was Virgin Money at £5.8bn.”
£17,500
The average financial contribution from parentsCroucher also notes the type of lending parents are involved in. “The average financial contribution of parents is £17,500, but not all of these are loans as 57% are ‘gifts’,” he says. “Moreover, 18% are interest-free loans. Only 5% come with interest attached.”
On the shift to parental dependence, he says: “The rising cost of housing and low incomes make it hard for aspiring homeowners to save a deposit to buy their first property. Rents and house prices have spiralled in some parts of the country, particularly London, because of a property shortage.”
Backing this up with figures, Croucher says: “Most [estimates of housing demand] fall between 200,000 and 300,000 of new units needed a year in England alone. Government statistics show there were just 142,890 housing completions in England in 2015.”
Turning his attention to London specifically, Croucher cites figures from the Office for National Statistics, revealing that between 2005 and 2015 the average house price in London “leapt 90%”, while the rest of the UK saw a 50% rise.
International Business Times report
The strongest challenger bankL&G CEO Wilson gives his own views on the study’s findings in an illuminating article for The Telegraph. Neatly summing up the situation, he says: “If you are aged 50-plus and have children, then the UK’s strongest ‘challenger bank’ is probably headquartered in your living room.
“If, on the other hand, you are under 40 and trying to buy your first home, your bank managers may well include your parents, or even grandparents.”
Wilson goes on to outline reasons why this trend has “potential flaws”.
First: “For every parent who can help, there are several who cannot. The desire to help family members has been around for as long as there have been families – but it can bake in unfairness.”
The second issue Wilson points out is the high proportion of income that older ‘lenders’ are putting aside for their children. He says: “[Parents] will increasingly need to ensure that their own income and care needs in retirement can still be met even after providing housing support to their children.”
Wilson concludes: “What is very clear from our research is that BOMAD on its own cannot solve the crisis of housing supply and affordability.”
He is dubious about whether recent Government initiatives, such as the Help-to-Buy scheme and the Lifetime ISA, will alleviate the situation. “These may help some, but ultimately they introduce more money into the system, stoking up housing demand when the real issue is about the supply of housing.
“There is no substitute for Build, Build, Build,” he says.
The Telegraph comment
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