Opinion  

Springboard to financial freedom

George Martineau

Barclays’ recent introduction of a 100 per cent mortgage highlights how issues with financial planning across generations are still intertwined.

One of the biggest issue of our times in the UK is how we can help younger people afford new homes.

Barclays has taken an initiative to address this, helping first-time buyers onto the mortgage ladder with its offer of the first 100 per cent mortgage in many years.

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However this should not be seen as a return to the come-what-may attitude of the early noughties when mortgages were given to anybody, which eventually was shown up as the flimsy bedrock that contributed in large part to the financial crisis.

Not so this time – there’s a catch! While there is no need for a deposit, customers need a friend or family member to put up 10 per cent of the home’s value in a Barclays savings account for three years (the money returned at the end of this time with 1.5 per cent of interest added).

In general, we think this is a very good idea – and what in effect has happened is that the risk of default has now been shifted from the bank, and thereby society at large, to the friends and family of the person applying for the mortgage.

In reality, of course the people putting up the money will be the parents – the Bank of Mum and Dad is now one of the key sources of finance for the younger generation.

But money doesn’t grow on trees, and for those in their 50s, 60s and 70s to be giving money to their children and grandchildren in order support a house purchase, means that they’ll have less for themselves.

And it’s not going to be an inconsiderable amount they will be short – with the average house price in my home city of Edinburgh at about £233,000, for the Barclays account alone that would mean people funding a £23,000 deposit in all but name. Of course, many parents are putting up much more than that.

What’s the bottom line here? For older people it means that they’ll have to save even more for retirement if acting as a guarantor for your child’s mortgage becomes a key task in later life.

Should this trend continue indefinitely, this means those in their 30s and 40s should now be considering how much they are putting towards the pension – that dream of a second home in the sun has been pushed down the pecking order by your child’s future mortgage needs.

George Martineau is senior financial planner at Tcam