It’s the cross-generational issue that’s going nowhere. For many, the so-called ‘Bank of Mum and Dad’ is the only route to property ownership. Personal finance journalist Emma Lunn shares her tips on how to approach this thorny issue, alongside three Vitality members who share how they are tackling it…
After years of property price inflation, owning a home is just a dream for many young people. And the deciding factor for who can step onto the property ladder, and who can’t, is often whether the Bank of Mum and Dad is able – and willing – to oblige.
According to the independent thinktank Resolution Foundation, the Bank of Mum and Dad is now one of the top 10 biggest lenders in the UK. The Foundation’s research reveals that it would currently take a first-time buyer in their late-20s about 18 years to save for a deposit if they relied on savings from their own disposable income. So it’s no wonder parents are stepping into the breach to help their offspring onto the property ladder – either by letting their adult children live with them rent-free as they save for a deposit, gifting cash for a deposit, or guaranteeing mortgage payments.
Choosing a financial strategy to help your children buy a home will vary depending on your age, their age, and your personal circumstances. Here’s some inspiration to help you choose the right path for your family…
Parents with young children
If your children are still young, you’re arguably in the best position to help them, even if flying the nest seems a long way off.
“Most cash savings accounts currently have poor interest rates that are below the rate of inflation. This means you are actually losing money in cash savings over the years. That could be especially significant if you are saving for a more distant goal, such as helping your now young child get on the property ladder,” says Laura Whateley, author of Money: A User’s Guide (£8.99, 4th Estate).
“Investing in stocks and shares over the long term might help to grow your savings much more. You can start investing with small sums and set up a Direct Debit to drip-feed money into those accounts each month.”
According to the Association of Investment Companies, someone investing £25 a month in the average investment company over 18 years would contribute a total of £5,400, but their pot would grow to £16,846. Saving £100 a month for 18 years in the average investment company would generate a pot worth £67,384.
Investing via a Junior ISA (JISA) means your returns are tax-free, under current legislation. You can open a Vitality Junior Stocks and Shares ISA with as little as £50 a month, or a lump sum of at least £1,500.
“Knowing we’re saving for our son’s future is a load off our minds”
Accountant Amaka Chigbue, 34, from south-west London and her husband Gozie, 38 (an investment director), want to help their four-year-old son Michael buy a home.
Amaka says: As a family we think about the future and what we leave behind, so we’re organised with our finances. When we started thinking about saving for Michael, it was with a view to saving for his education.
We thought we’d leave him property in our will but, later, we decided to save for him to buy his own place. It’s hard to get a foot on the property ladder, so we want to help him in any way we can.
As well as having a will and life insurance, we put £100 in a savings account every month, then every year the total is transferred to a Junior ISA. We also save varying amounts into the Junior ISA whenever we can and I use cashback websites such as KidStart (kidstart.co.uk). We’d like to have saved enough for a 30% deposit on a future property.
Saving now is a load off our minds. I’d love to see Michael in his own place one day – somewhere with clean air and lovely gardens.
Michael will have to work hard for himself, too. We expect him to focus on his career and get a good job to be able to contribute to a deposit or mortgage; it’s not just going to be handed over. He will need to feel the pinch a little, so he works hard and appreciates everything he has.
Parents with adult children
Allowing adult children to live in the family home rent-free is one way parents can help them to save for a deposit faster. Saving up could be one reason why 3.4 million people aged 20 to 34 were still living in the family home in 2018 (1 million more than in 2003).
Meanwhile, the Bank of Mum and Dad has bred a new category of “family mortgages”, says Whateley, with several lenders offering 100% mortgages if a family member locks 10% of the property price into a cash-linked bank account. “This is a great way for parents to keep hold of their money but still help children onto the property ladder. Parents can usually access the money within three years as long as the child meets all their mortgage repayments,” she says.
But bear in mind that these mortgages can be more expensive than conventional loans: gifting cash for a deposit might work out cheaper. Mortgage lenders will ask for confirmation that the cash is a gift and won’t need to be repaid.
If you decide to loan, rather than gift, money to your child, you’ll need to declare it as a loan to the mortgage lender. The lender will then want to know whether you expect a stake in the property and when you’ll want your money back.
Parents who don’t want their savings tied up with their child’s mortgage but who have sufficient income or equity in their own property, can act as guarantor on their child’s mortgage. This means the parent covers mortgage payments if their child defaults.
“I want to give my sons the same opportunities I enjoyed…”
Editor Helen Renshaw, 58, has started making plans to help sons Archie, 27, and 25-year-old Ed onto the property ladder in north London, where they all live.
Helen says: Looking back, I had it easy. When I was the age my sons are now, finding somewhere affordable to live was no big deal. When I first moved to London at 21, I lived in cheap rental accommodation before buying my first place at 26. It was a cosy studio flat, and cost just £41k.
But both property prices and the cost of renting have rocketed since then – and salaries haven’t kept pace. So now, even though Archie and Ed are both in good jobs with a decent joint income, they just can’t even think about buying their own homes without help.
This is especially true in London, where the average cost of a property is almost £480k. The situation is a struggle for Archie and Ed in different ways.
Archie is living with friends in a private rental. But it’s so expensive that paying his share eats up a big chunk of his salary. He’s not in a position to save, and it feels like he’s lining his landlord’s pockets.
Ed, meanwhile, still lives at home, contributing money to the bills. That’s great for me, because I like having him here and the extra money comes in handy. But like any other young person, he needs to fly the nest, and I respect that.
I have written a will, and have life insurance and Vitality health insurance to help protect my own wellbeing. But I don’t have enough savings to help Archie and Ed buy their own home. It was only coming into an inheritance recently that made it a possibility.
I decided that instead of using the money to pay off my own mortgage, I’d use it to gift the boys £35k each as a deposit on a property. They need it now, not at some point in the future.
We are still in the early stages of making this happen, but the plan is for them to buy somewhere together, pooling their deposits so they have £70k to put down on a place. They should be able to raise a decent joint mortgage, but even then won’t have enough to buy a two-bed flat in north London where they both work.
As a result, we’re investigating either shared ownership or the possibility of me liberating some money from my pension to buy a third share of the flat.
There are so many things to consider – is shared ownership a good idea? What about Help to Buy? What happens when one of them wants to move in with a partner? What if they fall out over the washing up?
It’s a complicated situation and not ideal. Ideal would be them being able to afford their own place without any help. But I believe it will be worth it to give my sons a taste of the opportunities I enjoyed.
Young people without family help
There are, of course, many young people who cannot count on the Bank of Mum and Dad to help them onto the property ladder. But there are options here, too, when it comes to buying a first home.
“Government schemes such as the Help to Buy equity loan can help those with small deposits,” says Whateley. “The government lends 20% of the cost of the home you want to buy, if you contribute 5%. The 20% loan is interest-free for the first five years. After that, interest is payable. You have to buy a new-build home. Some people have criticised the scheme for pushing up prices of new-builds, however, so do your research.”
All young people saving for their first home, with or without parental help, can open a Lifetime ISA (LISA) – a tax-free savings or investments account designed to help those aged 18 to 39 buy their first home or save for retirement. The LISA lets you save up to £4,000 every tax year, with the government adding a 25% bonus on top. That means you could get £1,000 of free cash each year. To get the bonus, the money in a LISA must be used to buy your first home or to fund retirement after the age of 60.
Another option is shared ownership. This is where a buyer purchases a share of a property, and then pays rent to their local council or housing association for the remaining share. There is the option to buy more shares later on until you own the whole property.
“Saving gives us a great sense of achievement”
Not every young person has access to a bank of mum and dad, or the desire to borrow from it. Marketing executive Hollie Chase Caldeira, 24, and her 23-year-old partner Adam Punchard, a fixed income sales and trading analyst, are determined to save up for their own home.
Hollie says: Adam and I have always dreamed of becoming homeowners. We’re independent, and although we’ve lived with our parents since graduating from uni, we’d like our own space and are saving for a deposit to buy.
We’re aiming to save a quarter of our monthly salaries each month towards our goal of up to £20k for a deposit. Then we’ll consider a help to buy equity loan.
We originally thought of renting, but eventually decided that having a mortgage would be more beneficial to us, financially.
And while we’re planning to save a deposit ourselves, our families help in so many ways; by letting us live at home now, and by always being on hand with advice on saving and property. We’d like to live in or near the countryside and are looking to buy in Essex, Berkshire or Oxfordshire.
We don’t enjoy as many meals out or trips to the cinema as we used to, but we hang out at friends’ houses and cut back on things like clothes shopping.
Investing for the future is important to us, and owning a property is a massive part of that; not just for us but also for future generations of our family. Working and saving gives us a great sense of achievement.
Home, sweet home
Whichever way parents can help their children buy their first home, the most important factor is that the monthly repayments are affordable. As well as that, it’s a good idea for new homeowners to consider insurance to protect their mortgage payments should they become seriously ill or unable to work. If you’re in this position, why not check out Vitality’s Mortgage Protection Plan? It will cover your mortgage payments if you die, with optional extras that can also protect you if you fall seriously ill or are unable to work, meaning your dependants won’t have to worry.
Sources: Association of Investment Companies, Aug 2019; Office for National Statistics, Aug 2019; UK House Price Index, Land Registry, Sep 2019.