What should the Bank of Mum & Dad consider?
With many furloughs coming to an end and an increasing number of redundancies being announced, the Bank of Mum and Dad (aka BOMAD) is being asked to step in on a regular basis to help its adult children with their financial commitments.
Parents are seeing their children’s debt escalate, which is often primarily due to rent payments. Under coronavirus legislation, private landlords have to give their tenants 3 months’ notice to quit but nevertheless the payment is still due. While homeowners can take a mortgage payment holiday and add the debt to the end of the mortgage, tenants have to repay what they owe much more quickly, even if they have agreed a schedule with their landlords. Housing benefit is often unlikely to cover the full rent. With no source of income on the horizon, grown-up children may resort to requesting a parental bailout.
One hazard in a shared house can be that one of the occupants may decide to ‘disappear’ if they are very behind with the rent, leaving the other housemates to cover the arrears. This is a particular issue if the parents of one the remaining tenants had agreed to act as rental guarantors at the outset.
Which leads on to the next stage of helping with house purchases. Many parents are keen to help their offspring to get a foot on the property ladder. According to Legal and General, the average contribution by the Bank of Mum and Dad rose by more than £6,000, to £24,100 in 2019. This put it in the top 10 of UK mortgage lenders, with parents having given £6.3 billion collectively.
In the current climate, especially with many high Loan to Value (LTV) mortgages being withdrawn, parental input is certainly needed. But when parents may be facing financial difficulties of their own, are they going to be as willing to keep on lending and gifting deposits?
Some parents may decide to hold fire in the hope that more properties may come onto the market and prices may drop dramatically. Others may decide that if it’s been a bit of a shock to the system having a grown-up child suddenly back under their roof under lockdown, helping provide the funds for a quick house purchase may be preferable!
If you do decide to act as the Bank of Mum and Dad, it’s important to make sure you can afford it. If you’re using your pension and savings to help out, consider what impact that will have on your own retirement.
It’s also important to make sure it’s clear whether the money is a gift or a loan, as this will have different tax implications. If your child is moving in with a partner, you may want a say in how the rights to the property will be held should the relationship break down at some point.
Do get in touch if you have any queries regarding the issues involved in being part of this well-known financial lending institution.