How to run the bank of mum and dad

17 May 2012

Kids are expensive. There are plenty of surveys and statistics out there that shock us all by totting up the total cost of raising a child. According to insurer LV=, getting a child to the age of 21 will set you back £218,000.

But what about after that? Most parents now admit to helping out with their children's finances well beyond their 21st birthday. So why is the bank of mum and dad staying open longer and longer, and can you really afford to continue paying out for your children as you approach retirement?

University fees will hit record highs in September when they rise to £9,000 a year. And yet once you've forked out for all that education, there is no guarantee your child will get a job, with youth unemployment soaring and one in five 16 to 24-year-olds out of work.

Even if you are lucky enough to have a child in full-time employment, chances are they still can't afford to buy a home of their own. The average first-time buyer is now aged 38, thanks to tight mortgage lending and unaffordable house prices.

Lender of last resort

Financial pressures have left many young people with no other option but to ask their parents for help, whether to claw themselves out of debt or simply to help them cope with day-to-day living costs. One person who understands this better than most is Nick Mayes, 27, who moved back in with his parents in Bracknell last November.

"Moving back home is not something anyone really wants to do," says Nick, who works in catering and chose to return home as he was struggling to survive on his £12,000 a year salary. He was just about making ends meet but had no savings, and the bills were mounting. "I'm a firm believer in living within your means," says Nick.

He is clear he doesn't want to be home for long. "I'm trying to make the best of a difficult situation by moving back and saving each month, so I'll be in a better financial position and able to move out within the next year or so."

One of the main reasons children turn to the bank of mum and dad is for cash to get on the property ladder. A recent study from Legal & General shows that 85% of first-time-buyer purchases are made with parental support.

One such case is Ewan Robertson, 33, who works in PR and moved back in with his mum, Claire, 68, in order to save for a deposit. "In some ways it was fine, but in some ways it wasn't," says Claire.

Ewan had originally planned to be back at home in Guildford for 18 months but actually stayed for four years. Claire admits that despite being initially pleased to have him back, she's even more pleased he's finally moved out.

Guidelines were laid out when he first returned: Ewan had to do the ironing and keep his room clean, but she admits these lapsed over time and she wasn't strict enough to enforce them. They also agreed that Ewan would pay a small amount of rent. "Ewan thought I was greedy for asking, but I knew it would help us both in the long run," she says.

Claire says the situation, though not ideal, made practical sense. "His moving back was a bit like a suspended adolescence and we had our differences, but without my help he wouldn't have been able to buy on his own," she adds.

Cashing in

However, not all parents are simply opening their home to their children - many are handing over cash. The average parent is giving away £1,430 a year to their children, according to the latest Aviva Real Retirement Report.

"Traditionally, when children fly the nest parents start finalising their retirement plans or surviving on a fixed income, and so unplanned costs and supporting others can have a significant impact on their future standard of living," says Clive Bolton, spokesperson for Aviva.

"Family loyalty often overrides financial sense," says Alistair Cunningham, director of Wingate Financial Planning in Surrey. He has seen a big increase in the number of parents and grandparents wanting to give money to their older children but, he explains, it is important that parents don't give more than they can afford.

Many of the parents Cunningham sees are putting their own savings at risk by being over-generous with their children. "A parent giving money to a 20-something child could live for 30 more years and they need to be able to afford this."

Giving money to your child will help them, but you need to be able to meet any ongoing monthly payments of your own, such as energy bills, food shopping and transport costs, and any extras, such as holidays.

It's also important you can keep up repayments on any debts of your own, a mortgage, for example, and if you put money away regularly either into a pension or a savings account, you should only reduce the amount if you can realistically afford to do so.

"Saving for retirement is vital, as people don't want to have to choose between helping their family and maintaining their own standard of living," says Bolton.

Offset your risk

If you are in a position to help out a child, the first thing to decide is how you want to help them. If you are going to throw open your doors and let them move back home while they save their own money, do you want to lay down some ground rules first, such as rent, housekeeping and privacy rules? If you would rather give your child cash, is this a gift or a loan?

If you want to help your child get on the property ladder, there are specific products to consider, for example, the Lend a Hand mortgage from Lloyds.

This 95% loan-to-value (LTV) deal was launched in May 2009 to throw a lifeline to struggling first-time buyers. The child stumps up 5% of the deposit while the parents put 20% into a linked fixed-rate account, which offsets the risk of lending to the child.

The Family First Guarantee from National Counties Building Society works in a similar way. If the child's LTV needs to be higher than 75%, a parent or grandparent is required to act as guarantor, providing additional security. Both these products allow you to help your child while maintaining control of your own finances.

As prices rise and unemployment grows, keeping the doors of the bank of mum and dad open is vital – but parents need to be sensible lenders or this bank could fail.

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