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The Bank of Mum and Dad: helping your children on to the property ladder

We hope you enjoy this article from our archives. As investment, pension and tax rules change a lot over time, the information in this post may not be current, but we hope you still find it interesting.

When it comes to your children’s future, not much is predictable. You don’t know if your child will be gay or straight, artistic or sporty, a deep-sea diver or Wimbledon champion. However, one thing you can be fairly certain of is that they’ll need a place to live when they grow up. How do you ensure the Bank of Mum and Dad has enough in it to help them?

Rising house prices in the UK have made it hard for young people to buy a first home. In fact, in a poll we commissioned 73% of people said it is almost impossible to get on to the property ladder without financial help from family.

The good news is that a bit of preparation today can help your children – or grandchildren, nephews or nieces – get their hands on those first front-door keys.

It matters where they want to live

You probably knew this already but it really does make a difference where in the country your children would like to buy. A 10% deposit on an average home in Derby will cost just under £16,000, according to research by us. The equivalent deposit in London would be more than £47,000.

Of course, the decision of where to live is your child’s, so you may want to be flexible in your budgeting to give them the choice to live where they want.

Mortgage terms vary so it’s best to be on the safe side

We used a 10% deposit in the research we just mentioned, but of course you can budget for more or less. Currently, mortgage lenders in the UK generally require a deposit of at least 5% but first-time buyers generally choose to put down more, 15% on average in 2018.

A larger deposit indicates you are a less risky borrower, which means lenders are more likely to accept your application. A bigger deposit can also help you access a better mortgage deal, which means lower monthly repayments. Banks’ willingness to lend varies based on a variety of factors.

House prices are hard to predict

Economic growth, housebuilding, government policy – all of these factors and more affect house prices in ways that are not easy to predict. That means any forecast for the cost of your child’s future home must be treated as sketchy at best.

At various times in the past, UK house prices have risen far faster than inflation, meaning the average home today costs more than double what it cost in 1975 in real terms. What this means is that houses are more than twice as expensive, relative to other goods and wages, than they were.

There’s no guarantee that houses prices will continue to rise, but, between 2010 and October 2019, the average house price in the UK increased by an average of 3.4% each year. Make of that what you will.

Government help may be available

The good news is that government schemes may be able to give your children a hand. Under the Help to Buy scheme, your children may be eligible for an equity loan from the government to pay for up to 20% of the cost of a newly built home – rising to 40% in London. Your children might also consider options such as shared ownership, in which they would buy a 25-75% share of a property and pay rent on the rest. The drawback is that it is not certain that these schemes will exist in their current form by the time your children want to get on the property ladder. For example, the Help to Buy ISA, a type of saving account designed for first-time buyers, closed to new accounts on 30 November 2019 (the similar Lifetime ISA is still available – more on that below).

Not sure how much you’ll need?

It’s difficult to know how much to budget for, but we do know the Bank of Mum and Dad is an increasingly popular source of finance. A report by Legal & General from last year that found that 62% of homeowners under-35 received financial help from family or friends before they bought their property. The typical contribution from friends and family was £24,100 in 2019, according to the research, rising to £31,000 in London. According to this research, the Bank of Mum and Dad is effectively the 11 largest mortgage lender in the UK.

How to prepare and manage the funds

If your child is already an adult, urge them to set up a Lifetime ISA. These accounts benefit from a 25% government top-up on contributions, making them a tax-efficient way for your children to build towards their first property purchase.

If your child is not yet an adult, a Junior ISA might be a good option. You can set one up and make contributions of up to £4,368 in the current tax year. The money becomes your child’s when they are 18, so if you are sure you want the contents of the JISA to go towards a property purchase, it’s worth discussing this before their birthday to ensure they understand your wishes.

Depending on your circumstances, a pension may also be an effective method of saving for a contribution to a deposit. Once you are 55 (likely to rise to 57 or 58 in future) you can access all the money in your pension if you wish. Pensions are potentially a very tax-efficient way of investing because of tax relief on contributions, however you may have to pay tax on money you withdraw from your pension. A financial adviser can help you weigh up the options.

start a pension

How to manage the assets in the Bank of Mum and Dad

Once you’ve decided which investment vehicle is right for you, you need to decide how to manage it. The right risk level will probably depend on how long you expect to invest the funds for. If your child will need the money soon, it’s probably best to keep it in a very low-risk investment or simply in a cash account at the bank. If your child won’t be buying a home for 15 years, the Bank of Mum and Dad can probably afford to take more risk with the investments, with the expectation of higher long-term returns.

You should also pay attention to the fees levied by your investment provider, as these will limit the investment growth. Nutmeg invests in a cost-efficient way because we want our customers to retain as much of their investment returns as possible.

Need more help?

If you’d like to talk about your situation, or you need help putting together a financial plan for the Bank of Mum and Dad, our advice team are always available to help.

Sources

  1. We commissioned Populus to conduct an online survey of 2,083 GB/UK adults between 29 November and 1 December 2019.
  2. Research by Halifax, published on 23 February 2019.
  3. Based on data from Nationwide. The average house price was £10,388 in the first quarter of 1975, which is £97,810 when adjusted for inflation.
  4. The average house price was £167,469 in 2010 and £232,944 in October 2019, the most recent date for which data was available at time of writing, according to the UK House Price Index. This implies an average annual growth rate of 3.4% over the period. This measure includes detached houses, semi-detached houses, terraced houses, flats and maisonettes.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Forecasts are not a reliable indicator of future performance. Tax treatment depends on your individual circumstances and may be subject to change in the future.