Pension specialist at Royal London, Helen Morrissey has issued a stark warning to retirees who are thinking of helping their children onto the property ladder. In simple terms ‘don’t do it’ as retirement plans can be jeopardised by doing so.
Morrissey says: “While it is natural that parents want to help their children get on the housing ladder it must not be at the expense of their own financial security in retirement. Financial circumstances can change quickly and parents must take advice before lending money to their offspring on whether they can genuinely afford to manage without this money over the long-term.”
Morrissey’s comments come in response to Legal and General’s research showing the so-called Bank of Mum and Dad (BoMaD) contributed £6.3bn to help their children get on the housing ladder.
BoMaD lending is becoming increasingly common according to Paul Flavin, founder of Mortgages Online, who says it seems to be the “default option”.
Flavin says: “The current first-time buying generation has become accustomed to their mortgage deposit coming from their parents. With the rise in house prices, and the more cautious approach from many mortgage lenders moving away from 100% mortgages, we have seen more and more early buyers relying on the ‘Bank of Mum and Dad’ as the only option when it comes to finding the deposit.
It is easy to see why this warning has been issued as retirees might have to take into consideration health issues, sudden care costs or a change of circumstance, where immediate cash might be needed. If a lump sum for a first-home has been given by the parents, they might be left short to cater for their own retirement needs.
There are however, other options for first-time buyers other than relying on the ‘Bank of Mum and Dad’ as suggested by a 2017 guide by Royal London.
“Some commentators have highlighted the limitations of the Lifetime ISA, in that the savings can only be taken out either at age 60, or on the purchase of a first home” notes Flavin, “but investors who have saved the maximum of £333 a month for the past two years now have a nest egg of £10,000. With average house prices currently running at just over £200,000, and in many locations substantially below this, we are now seeing buyers able to enter the market again without having to rely on their parents.”
There is the equity release option, for parents who have wealth tied up in their home. However, the amount you can release depends on your age as well as the value of your property.
Finally, parents can act as their child’s guarantor. An increasing number of mortgage deals allow parents to act as guarantors on their child’s mortgage or else have their savings used as security,
The idea behind such products is that because the purchaser has increased financial backing the lender is able to lend more, often at a lower interest rate than would otherwise have been the case.
The two main types are: guarantor mortgages, which enable a parent or family member to guarantee the mortgage repayments. This means that if a payment is missed then the guarantor will have to cover the cost; family deposit mortgages, which allow a family member to deposit money into a savings account where it is held for a fixed period as security. During this time the money still earns interest but if the borrower defaults the money will be taken from the savings account.