From the moment we’re born, we rely on our parents to feed, clothe and treat us. As we enter adolescence it continues: from pocket money and school trips, to funding our budding social lives. Then, later on, driving lessons and university costs.
It’s become increasingly common for young people to turn to their parents for financial help when buying their first home. Research by Legal & General in 2019, estimated that parents are collectively lending or gifting their offspring £6.26bn – a figure that’s high enough to rank the ‘Bank of Mum and Dad’ tenth in a list of UK lenders.
While that figure has fallen this year, due to the impact of the pandemic on the housing market, the percentage of home purchases funded wholly or partly by the Bank of Mum and Dad is estimated to rise from 19% to 23%, new research from Legal & General shows.
What do mum and dad think?
A report carried out on behalf of the London School of Economics in 2019 surveyed 800 parents across the UK, and found that although most were pleased to be able to help their children, about half of these thought it was unfair that they should have to do so.
Those who provided financial help to their children were not necessarily characterised by high incomes (many of the survey respondents were already retired), but rather by their level of wealth. Much of this wealth came from their own homes, but most also had savings, investments and sometimes inheritance, and this was the money they used to help their children. In some cases, the recipients actually had higher incomes than their parents.
A difficult decision for parents
Legal & General’s 2020 research shows that the coronavirus crisis has encouraged parents to be even more generous than usual, with almost one in five (18%) wanting to give at least 50% more than they would have done before the pandemic.
But they face a difficult choice between helping children, and setting money aside for their needs in later life.
While 39% of parents lending are using cash savings to provide financial assistance, more than a quarter (27%) are using inherited funds, or even downsizing (12%), to help their children buy their own home.
Raiding pension pots and using savings can endanger parents’ own future financial stability, and the prospect of poverty in old age will make some understandably reluctant to offer help.
Thinking about the future
Those now aged 50+ might well be the last generation of parents that can afford to give generous help. Future generations are less likely to accumulate housing wealth, or indeed pay off their own mortgages at the same rate, and few will have final-salary pensions.
This is certainly true of Kate, 66, a retired nurse from Birmingham, who is mum to three grown-up children, Michael, 39, Jane, 37 and Debbie, 35. Here’s her story.
“From the moment our children were born, their future financial security was always at the forefront of our minds. My husband and I were both nurses by profession, which isn’t a particularly highly paid occupation, but it is a secure one.
“In the early days, when the kids were small, Derek was very prudent with money, and he would often shop in charity shops for toys and accessories. We also purchased our first property at the age of 21, so by the time we reached middle age, we had moved to a detached property and paid off the mortgage. We could then put any surplus cash into a savings account, to ensure our financial security later in life.
“My parents were also financially accommodating with the children, and set them up with Premium Bonds accounts when they were first born. I’ve since done the same with my three grandchildren, James, Henry and Chloe.
“We taught the children the value of money and encouraged them to take up part-time jobs as teenagers. We had a financially challenging time when all three of them entered higher education at the same time, and their student loans only went so far. We paid their tuition fees and gave them an allowance, so they didn’t have to work during term time. However, they were all made to get holiday jobs to save up for their next term at university.”
Helping out in adulthood
“Jane dropped out of university after the first year and came back to live with us. We let her live rent-free and insured her on our car, to make sure she could travel around to interviews, etc.
“After university, Michael and Debbie returned home while they searched for jobs, and both secured jobs in London. This meant the loan of security deposits for flats, which I am sure we never got back!
“Then, in their early 30s came the weddings and first houses, which, compared to our day, were vastly more expensive. Each of our children is earning more than we ever did.
“We set a budget of £5,000 each towards weddings and £5,000 each for a property deposit. I think this was only a fifth of the amount my son needed for his London flat, but while we wanted to help them out, we also wanted them to stand on their own two feet.
“When my mother died, we sold her property and gave each child a percentage of the money from the sale. We wanted to ensure that each of them had a nest egg in case they hit hard times in their lives, such as redundancy.”
Freeing up equity
“Now Derek and I are in a position to downsize our three-bedroom house to a two-bedroom bungalow, and this will free up some equity. This will give us enough money to last us to the end of our lives, and it will also leave a lump sum to ensure our grandchildren are well provided for.
“Ours isn’t a unique situation. It is one that is facing parents across the UK, particularly boomers.”