Passing On The Family Wealth: The Role of The Bank of Mum and Dad in Financing Property Purchases

The Bank of Mum and Dad has become an increasingly popular form of financing for property purchases, as many parents look to help their children secure a mortgage. In the UK alone, it is estimated that parents are providing approximately £5 billion in funds to help their children finance their first home. This blog post looks at how the Bank of Mum and Dad is helping young people get onto the property ladder and the implications of this growing trend on the housing market.

What is the Bank of Mum and Dad?

The Bank of Mum and Dad refers to parents who financially support their children in purchasing property, often by providing them with money for a deposit or acting as a guarantor on their mortgage. In many cases, this support is becoming increasingly important due to rising property prices, stagnant wages, and stricter lending criteria from traditional banks and lenders.

This trend has become so prevalent that in recent years, the Bank of Mum and Dad has been dubbed as the ninth-largest mortgage lender in the UK, surpassing large lending institutions such as Clydesdale Bank and Virgin Money.

The concept of the Bank of Mum and Dad may have been around for a long time, but it has gained more prominence in recent years due to changing economic circumstances and the changing needs of families. For many parents, helping their children get on the property ladder is a way to pass on their family wealth and ensure their children have a secure financial future. However, this also poses risks, which we’ll explore later in this post.

Regardless, the Bank of Mum and Dad is a trend that shows no signs of slowing down anytime soon, with parents continuing to provide support to their children in buying homes and securing their financial futures.

How do parents help their children buy property?

As property prices continue to rise, getting on the property ladder has become increasingly difficult for many young people. This is where the Bank of Mum and Dad comes in. Parents are often in a position to help their children financially, and many are choosing to help their children buy their first home.

There are a few different ways that parents can help their children buy property. One option is to provide a gifted deposit. This means that parents give their child the money needed for a deposit, which is usually around 10% of the property value. By providing this gift, parents can help their children avoid having to save up for a deposit for years, which can be especially difficult in areas with high property prices.

Another way parents can help their children is by acting as a guarantor. This involves parents agreeing to guarantee a portion of their child’s mortgage. For example, a parent might agree to be responsible for 20% of the mortgage if their child defaults on the repayments. This can help their child secure a mortgage, even if they have a smaller deposit or a less-than-perfect credit score.

Some parents may also choose to lend their children the money for a deposit or even co-invest in the property with their child. This means that they own a percentage of the property and will receive a share of any profits when the property is eventually sold.

Overall, there are many different ways that parents can help their children buy property. By providing financial support, parents can help their children get onto the property ladder and invest in their future. However, it’s important to be aware of the risks associated with the Bank of Mum and Dad, which we will discuss in the next section.

What are the benefits of the Bank of Mum and Dad?

1. Access to Higher Loan Amounts:

One of the biggest benefits of the Bank of Mum and Dad is that parents can often lend their children larger amounts of money than banks or mortgage lenders. This can help children afford a more expensive property or increase their chances of being approved for a mortgage.

2. No Interest or Lower Interest Rates:

Parents may choose to lend money to their children interest-free, or at a lower interest rate than they would receive from a traditional lender. This can save the child thousands of dollars in interest payments over the life of the loan.

3. No Fees:

Unlike banks or mortgage lenders, the Bank of Mum and Dad may not charge any application, origination, or processing fees. This can save the child hundreds or even thousands of pounds in upfront costs.

4. Greater Flexibility:

Parents may be more flexible with repayment terms than a traditional lender. They may allow their child to pay back the loan over a longer period of time or adjust the repayment schedule to better fit the child’s financial situation.

5. Stronger Relationship Between Parent and Child:

The Bank of Mum and Dad can strengthen the bond between parent and child by providing financial support during a major life event. It can also help parents feel more involved in their child’s life and future plans.

Overall, the Bank of Mum and Dad can provide numerous benefits for children who are struggling to obtain a mortgage or purchase a property. However, it is important for both parties to carefully consider the risks and potential downsides before making a decision.

Are there any risks associated with the Bank of Mum and Dad?

While the Bank of Mum and Dad is a great way to help children get on the property ladder, there are potential risks associated with it that both parents and children should be aware of.

One of the biggest risks is that parents may put themselves in a precarious financial position by providing their children with large sums of money. This can have negative consequences for the parents’ retirement plans and future financial security. Additionally, if the child is unable to pay back the money, it can lead to strained relationships and potentially legal battles.

Another risk is that children may become too reliant on their parents for financial support. This can create a sense of entitlement and lead to poor financial decision-making. Furthermore, if the child is unable to meet their financial obligations, it can damage their credit score and hinder their ability to secure future loans.

Lastly, the Bank of Mum and Dad may also have tax implications. If parents gift large sums of money to their children, they may be subject to gift tax or inheritance tax, depending on their country’s tax laws. It’s important to seek professional financial advice to understand these implications and ensure compliance with tax laws.