Whilst it’s not an actual bank, the Bank of Mum and Dad (or BOMAD as it’s become known) continues to be in high demand. And for many parents this can bring stress and strain, with worries about how you’re going to get the money together to be able to help your children with life’s big purchases like buying a house.
It doesn’t seem like the need for help from parents is slowing down either. This year it’s thought that 50,000 UK property transactions will be possible because parents have dipped into their pensions for the deposit. A further 23,000 will be helped by parents’ annual income and another 44,000 will be supported by parents releasing equity from their own homes. 1
Would you put your own financial situation at risk to help your children?
For many parents, being the Bank of Mum and Dad can cause stress and worry. Naturally you will always want to support your children as much as possible, but if your finances are already stretched, it can be difficult to gift large sums of money without huge sacrifices. So much so that one in five over 55s who are helping their children on to the property ladder have recently said they’re accepting a lower standard of living for themselves in order to do so.2
If you’re currently in this position, before doing anything drastic it’s really important to think things through so that you can protect your own financial position for now and the future. Things like downsizing your property, delaying your retirement or sacrificing your pension to help your children get ahead could have huge impacts on your later life, so it’s always best to seek professional financial advice before doing anything and don’t make any rash decisions.
There’s also the questions around what to do when there’s more than one sibling to consider – for example, what can you afford to give each child? Do you keep things equal? New research has shown that one in five parents tend to not reveal the amount they gift to each of their children and 40% of parents also decide how much money to dish out to their children on the basis of how well-off they are individually.3
Tips for lending or gifting money to grown-up children
With little to no signs of it getting any easier for young people to get on the property ladder, the demand for the Bank of Mum and Dad doesn’t look like it’s going anywhere. To help reduce the stresses and strains this can bring, here are some tips to consider if you’re thinking about gifting or lending money to your children:
- Have open discussions with your children about their future, what your current and future financial situation is like and how you can work together to help each other out. Make sure to establish from the start whether any money you give them is a gift or a loan.
- If you’re already a homeowner and become a shared owner of your child’s property, then it will be classed as a ‘second home’, which will mean you’ll have to pay a higher rate of Stamp Duty on the transaction
- If you do decide to gift your child some money, it could incur an Inheritance Tax charge, so it’s worth speaking to a Financial Adviser before doing anything
- Educate your children from a young age about the importance of savings and being prepared for adult life. It’s a good idea to introduce them to what a mortgage is, what the family’s monthly outgoings are and how their financial situation will play a part in them getting onto the property ladder one day. If they have it in their mind from a young age, they’ll be more likely to know the value of putting their money to one side
- Educate them about the importance of their credit score when it comes to getting onto the property ladder. Some useful articles can be found here:
- Are you the parent of a credit virgin?
- How can your credit score help you get a mortgage?
- 3 first time buyer mistakes
- What information will a lender see about me?
1 Figures taken from: https://www.ft.com/content/42538c7e-ac55-11e8-89a1-e5de165fa619
2 Figure taken from: https://www.ft.com/content/42538c7e-ac55-11e8-89a1-e5de165fa619
Referencing Legal & General’s report: https://www.legalandgeneral.com/retirement/retirement-news/2018/the-generosity-of-the-bank-of-mum-and-dad.html