Bank of Mum and Dad using mortgages for gifting

It has been well documented that if the Bank of Mum and Dad was actually a bank it would be a top 10 lender.

Increasing numbers of people rely on financial help to get onto the property ladder and more are using gifting to support family members.

Research we carried out among homeowners aged over 50 found that 28% are willing to gift money to family and a further 25% would help their children get on the property ladder. But what is interesting is there are differences in reasons for gifting depending on the age groups.

Borrowers in the 50 to 65 age group are more inclined to help their children with a house deposit (31%) compared to 20% of those aged 66 to 80 and 19% of people 81 and over.

But the reverse happens for gifting to family. This includes reasons such as helping to pay off debts, student loans, home improvements, financing a wedding, buying a car or holiday. In the current climate it could just be to try to help family out with the rising cost of living. Almost four out of 10 people (38%) aged 81+ are more likely to gift compared to 32% aged 66 to 80 and 23% in the 50-65 age bracket.

This could be because the lower age group tend to have adult children who are at that stage of life when they are wanting to buy their first home. The older age groups may be gifting for early inheritance purposes or to bring down their inheritance tax liabilities.

People may not have spare cash to gift to family but many homeowners have substantial equity tied up in their property as house prices have soared over the last 20 to 30 years, including since the outbreak of the pandemic.

Tapping into housing equity

The latest ONS data shows that annual house prices in April 2022 rose by 12.4%, up from 9.7% in March, and the second highest growth rate since June 2021 when it reached 13.3%. This takes the average UK house price to £281,161, which is almost £31,000 higher than the same time last year.

Over the past decade, people who own their home outright on average have lived there for between 22 to 25 years, according to data research firm Statista. Those with a mortgage have lived in their home on average for 10 years.

If you compare house prices, 10 years ago the average home cost £167,854, a difference of £113,307 representing a 68% increase.

Homeowners who bought 22 years ago at an average price of £89,230 will have seen a substantial rise of 215% or £191,931.

Obviously, these are just average prices and does not take into account regional differences, type of property, number of bedrooms and so on. But it gives an idea of the huge amount of equity many homeowners have in their property.

Around 6% of our gross loans are used for gifting and the average loan size is £220k. This doesn’t all necessarily go towards gifting or a house deposit but can be part of the reason.

Statista calculates that in 2021, an average first-time buyer deposit at 20% was £53,935, but in Greater London, it was more than double that. The gifted money can also be used to pay for home buying extras such as stamp duty, solicitor fees, insurance etc, and for furnishing and decorating the new home.

The Bank of Mum and Dad will no doubt continue to grow and part of this growth will be via mortgages taken out by parents and grandparents to help their children financially.

Simon Webb is managing director – capital markets and finance at LiveMore

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