Families need to talk more openly about their finances before offering to help kids onto the property ladder, according to a report from the London School of Economics (LSE).
Parents who help their kids on to the property ladder are not necessarily high earners, as many are pensioners, but they have wealth through homeownership, savings, inheritances and investments, according to 'The Bank of Mum and Dad: How it really works', published today by the LSE and sponsored by the Family Building Society.
The research involved an online survey of almost 800 customers of Family Building Society, plus interviews and a focus group.
Typical 'Bank of Mum and Dad' donors are older, have higher levels of savings and are more likely to own their own homes, and were more likely to live in the south of England.
Most of the transactions in the study involved parents giving or lending money to their children.
About half of the transactions were for deposits on house purchases and the remainder used for mortgage payments, stamp duty and legal costs.
Parental contributions varied across the regions, with the overall average being a generous £59,248, rising to £76,2290 in London.
Around 50% provided money for some or all of the deposit, while approximately 20% paid for stamp duty or legal costs.
Meanwhile, some 10% paid helped with monthly mortgage payments and a similar number supported a mortgage by becoming a guarantor or a joint mortgagee.
Some 68% of assisted transactions were first-time buys, but 27% were second or subsequent purchases.
Bank of Mum and Dad concept misleading
The report suggests that the term ‘Bank of Mum and Dad’ is misleading, as few parents (or in some cases, grandparents) act like a bank.
Only around 15% of those who help with mortgage payments take financial or legal advice and there is usually no written record of transactions.
Researchers found that families often do not discuss arrangements for repayment; whether the money provided is a loan or a gift; and what would happen if one or both parents were to die.
Kath Scanlon, research fellow at LSE and co-author of the report, says: “This is not a conversation that a family has experience of or the vocabulary for.
"Is it a loan or a gift? Will interest be charged? What happens if a parent dies [during the loan period]? There should be a better framework for discussing this.”
Parents with more than one child usually want to treat them all fairly: some provide the same amount to each regardless of the children’s circumstances, while others give more help to those earning less; and some try to even up the support they’ve given through their wills.
Of those who had already arranged loans, 82% don't charge interest and about two-thirds say they only expect to be repaid as and when their beneficiary can afford it. Of those with a definite repayment plan, 54% expect to be repaid within a year.
However, of those who help with mortgage repayments, 58% had been offering financial support for more than two years and 43% for more than three years.
How to help your kids
The report recommends setting up a checklist to ensure parents and children have discussed exactly what they are doing and what everyone’s responsibilities are.
This should cover whether the transfer is a loan or a gift, repayment and interest charges if relevant, and what happens if there is a change of circumstance – for example, the child’s relationship breaks down or a parent dies or is in ill health and needs to pay for care costs.
Mark Bogard, chief executive of the Family Building Society, says: “The report confirms what we have long suspected which is that, while parents are happy to help their children, there is rarely any discussion about how any money should change hands or be repaid.
“Failing to carry out some basic planning and documentation can store up a whole of problems if things go wrong. Things such as the break-up of relationships, the death of one or both parents, or the need for parents to contribute to care costs in future, all need to be considered.”
The Family Building Society has brought out a guide to ‘How to run the Bank of Mum and Dad’, which is available on its website.
What to consider if you are thinking about joining the Bank of Mum and Dad:
- Sit down and have a frank discussion about the practicalities of parental support
- If you have more than one child with different financial needs, consider how to be fair in your parental support
- If your child is in a relationship, then ensure that they draw up a formal written agreement and seek legal advice to document and protect the financial help you give
- If more than one set of parents is involved, draw up an agreement that covers any future need to have the loan repaid
- Consider your own personal circumstances and how much you can safely offer while remaining financially secure in retirement
- Check on how a gift or loan would affect your tax liabilities and tax on your estate when you die
- Always have any agreement detailing the exact terms of the loan in writing
- If possible, seek legal and financial advice