For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
The Bank of Mum and Dad and first-time homeowners
The influence of the so-called Bank of Mum and Dad on the next generation of UK homeowners says much about the state of today’s property market. In fact, the numbers are simply staggering. According to research conducted by the Legal and General Group:
- More than 300,000 loved ones will receive financial assistance from family members in purchasing a home during 2016
- The average amount received will be in the region of £17,500
- The total received will be in excess of £5billion, and used to fund up to £77billion worth of property purchased
Given that this puts the Bank of Mum and Dad on par with leading mortgage providers in the UK in terms of pounds lent, it is effectively a powerhouse of its own within the industry. So it doesn’t come as a great surprise that many of these savvy savers are now expressing an interest in casting the net a bit wider, and lending to other more distant relatives, friends and even strangers looking to conjure up a deposit for a first home – with a view to earning a return on their outlay.
Why has the Bank of Mum and Dad become so influential?
Since records began, home ownership peaked as recently as 2003, with 71 per cent of occupiers owning their home. However, this figure has since dropped drastically, and, as at February this year had sunk to 64 per cent – the lowest level in three decades. Interestingly, this problem doesn’t appear to be confined to London either.
That the UK is in the midst of a housing crisis is no secret. Demand is simply outstripping supply at notable levels, and despite the alleged impact of the Brexit vote in the EU referendum, house prices continued to rise stubbornly by 5.6 per cent for the month of August (which followed a 5.2 per cent increase for July).
Added to that, recent research has shown that pensioners are actually earning more than the average worker, and that the gap between young and old is widening all the time. It puts into stark contrast the declining living standards among younger generations, and it is thus no surprise that this, coupled with the overheated property market, leaves the Bank of Mum and Dad pulling the strings when it comes to first-time buying.
So, is the idea of lending to those outside of immediate family a good one?
Of course, lending directly to others with respect to property is hardly new, and there are already peer-to-peer lending platforms in the UK which facilitate secured lending for those looking to get a foothold into the buy-to-let market. But there isn’t an official mechanism like this for lending for the purposes of a first-home deposit, and subsequent mortgage as such.
As a peer-to-peer platform ourselves, endorsing the benefits of such a concept comes easy. With record-low Bank of England rates, returns for investors are poor across many sectors of the economy, and this could present a significantly better alternative for a lender – in this case the proverbial Mum or Dad – to get better returns on their money.
Added to that, the borrower will be benefiting by virtue of the fact that the interest they pay on this rate is unlikely to incorporate the margins and fees associated with big mortgage lenders, thus creating a win-win.
Acknowledging the downsides and realities
For all our positivity with respect to such a ‘peer-to-peer’ approach, there can be no question that, beyond family lines, it can be risky lending money to first-time buyers without doing so through a regulated institution of some kind. Particularly when it comes to strangers, or distant friends and relatives, taking someone at their word is an insufficient guarantee that they will honour their debt repayments to you, and their creditworthiness needs to be properly assessed. There are also legal considerations when it comes to such loan types which the ordinary person on the street may not be aware of.
Furthermore, lending to friends and family is something that should be carefully thought through first, especially when such vast sums of money are likely to be involved. Failure to pay the money back in full, and on time, could put tremendous strain on relationships in the future.
A new dynamic to the market
The above serious considerations notwithstanding, there can be no doubt that the Bank of Mum and Dad brings a fascinating dynamic to the market for first-time homeownership. Some would argue that it isn’t something to be encouraged, given that the very prominence of the Bank of Mum and Dad itself puts into sharp focus the struggles of the younger generation in saving up for a house deposit.
Yet while there is still plenty of water to go under the bridge in terms of establishing a workable system, anything that brings new competition into the argument must surely be a positive thing for those who currently sit more than an arms-length away from the property ladder.
That’s not to say that there aren’t other alternatives, such as the Help to Buy ISA, and the planned arrival of the Lifetime ISA. But gathering the funds for a deposit is undoubtedly the biggest hurdle of all, and if a robust model can be carved out in which both lender and borrower benefit, then the power of the Bank of Mum and Dad can surely be a force for good in a country struggling with a crisis which seems to be getting worse – not better.
- Base rate cuts: What does it all mean?
- Are we really on the brink of a house price crash?
- Looking after your pension pot post-Brexit
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