How the bank of mum and dad can really affect families

As the first rungs of the property ladder seem further out of reach, many people are turning to a source very close to home for financial help. The practice of young (and not so young) people borrowing money from their parents to buy their first property is now widespread.

The shape of things to come

Research carried out last year showed that the ‘bank of mum and dad’ is now one of the top ten mortgage lenders in the UK, with parents set to lend their children £5 billion in order to help them get on the property ladder. With house prices now so out of sync with wages, the research estimated that parents will provide deposits for more than 300,000 mortgages.

Studies have shown that people receiving financial help to buy their first home is on the increase. Among current home owners, those living in London (32%) and the South East (31%) ­— two areas with the highest house prices in the UK ­— were most likely to have had financial support from family and friends.

In London, parental contributions made up more than 50% of the wealth (excluding property) of the average household in the capital.

At the same time, the number of people aged between 20 and 34 living with their parents has reached a 20-year high, with one in four yet to fly the nest. Affordability plays a part in this ­— saving for a deposit is one of the biggest hurdles to home ownership for young people.

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The effect on young people’s mental health

A new study suggests that ‘millennials’ — those born in the final years of the 20th century or the first years of the 21st — are currently in the grip of an anxiety epidemic. Over half of those questioned said money was among their top three causes of anxiety, and they were most likely to choose ‘working hard and getting on in life’ as their most important personal values.

In short, if you’re feeling anxious about money and looking to your parents for help, or if you’re a parent worried about your child’s happiness, you are by no means alone. Charity worker Amy Taylor, 33, turned to her retired parents for help to buy her first home — and the results could have been devastating.

Her parents loaned her money to buy a house and she promised to pay them back. After losing her job, Amy could no longer afford to keep up the agreed monthly repayments, just as her parents ran out of funds themselves. The family relationship nearly collapsed under the financial pressure.

Amy's story

‘When I was a teenager picturing what I might be doing on my 30th birthday, I saw myself in the garden of a home I owned with my husband, surrounded by children, family and friends. I didn’t expect to be single, in a job that I loved (which only paid me £24,000 a year) and still living rent free in my family home.

‘I didn’t imagine myself sobbing as my parents offered to give me the deposit I needed to buy a house — when they were in their thirties, they were in their second home and were preparing for the birth of their third child. The stark comparison of what I’d thought I would have and how my life had actually turned out was overwhelming.

‘My parents made it clear that the money was a loan and we agreed that I would pay them back £800 a month. Then I was made redundant. As I scrambled to find any work to keep myself afloat, I buried my head in the sand and tried to ignore the fact that I couldn’t afford the repayments.

‘Six months later, my parents were at risk of having to remortgage their own home because I’d failed with my repayments. I was so ashamed. I finally put my house on the market and moved to Yorkshire. After selling it, I was able to pay back my parents.

‘It was a traumatic experience that really tested my relationship with my parents. I’m so happy we’ve got through it.’

Amy and dad

Amy’s parents share their story

‘Every parent wants to help their child, and I’m grateful we’ve given Amy some hope for the future. But I’m torn as to whether or not I would’ve loaned her the money, knowing what I do now,’ says Amy’s mum. ‘I would certainly have had some formal documentation in place making everyone aware of what would happen if Amy was unable to make a payment. It would have made everything much simpler.

‘We knew it would be bitter-sweet selling our beloved holiday home in Dorset, but we were happy to part with it knowing it would help Amy. Little did we know that a few months down the line we would be approaching brokers in order to remortgage our own home, as Amy wasn't able to keep up her repayments.

‘My husband and I both grew up in London and were able get on the property ladder quite easily when we left university, but things are different for young people today. Amy’s been lucky as she was able to relocate to Yorkshire, where she’s under less financial strain — many of our friend’s children don't have that option.’

What to do if your relationship sours

As Amy and her parents discovered, there’s a risk that drawing on the bank of mum and dad could lead to the family relationship ending up in the red.

Dr Joan Harvey, a chartered psychologist and senior lecturer at Newcastle University, helped her son and two stepsons get on the property ladder. She believes that, where possible, a gift rather than a loan means fewer complications and a better chance of coming out of the situation with the relationship unscathed.

‘With a gift, the only complications will come if there are strings attached, such as the location of the property. And these should be made clear at the start,’ says Dr Harvey. ‘If not, then the parents have to keep quiet if they don’t approve of how their child spends the money.

‘A loan is more likely to lead to issues,’ says Dr Harvey. ‘You’re effectively becoming the bank, and that’s a whole different relationship. Loaning the money becomes a transaction, so it’s important to have some sort of contract. Otherwise, if there are strings or conditions that aren’t spelled out, there could be resentment down the line. Get all the details tied up in advance so nobody needs to worry. From the child’s point of view, it also takes away the feeling of being patronised.

‘Although a contract could imply a lack of trust, that’s not the case at all. It separates the business transaction from the personal relationship, allowing the latter to flourish.

‘If there are issues with repaying a loan, it’s crucial to keep the lines of communication open,’ says Dr Harvey. But she adds that it could be ‘nearly impossible to repair the relationship’ in those circumstances until the money is paid back.

‘If the only way to get back the money is to sell the property, that’s an awful position for a parent to be in. That’s why there has to be communication and clarity from the outset.’

Before giving your child money for their home…

Still considering helping your child get a foot on the property ladder? Then think carefully about how you’re going to give them the money, as a gift or a loan, and then seek financial or legal advice on how to proceed. And before you decide on anything, it might be wise to get them to compare mortgages available on the market. 

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