First-time Buyer  

Bank of Mum & Dad are failing to seek advice

Bank of Mum & Dad are failing to seek advice

The number of parents failing to seek financial advice before lending money to their children to buy a property is dramatically high, a report by the London School of Economics (LSE) has revealed.

The report showed only 8 per cent of parents who gave money to a child for a deposit sought advice from a financial adviser, while only 14 per cent took legal advice.

Of those that helped children with mortgage payments, only 14 per cent took financial advice, while only 12 per cent got legal advice.

LSE, which surveyed 1,066 respondents representing a wide cross-section of depositor and mortgage members, including customers of Family Building Society, stated parents and children must be more business-like when money is given to get on the property ladder.

The LSE stated despite the ‘Bank of Mum and Dad’ now being the sixth largest lender, there are usually no written record of transactions or arrangements for repayment.

LSE's report also warned that families are failing to make clear whether the money is a loan or a gift.

Mark Bogard, chief executive of Family Building Society, said failing to carry out basic planning and documentation can store up a host of problems if things go wrong.

Mr Bogard said: "Things such as the break-up of relationships, the death of one or both parents, or the need for parents to contribute to care costs in future, all need to be considered. So do the requirements of the taxman."

The survey showed the median parental contribution was £30,000, while the mean was much higher at £59,200 in the higher-cost areas of London and the south east.

Mean contributions have more than doubled in the last two decades, from £31,300 reported by respondents who provided help in the 1990s to £68,700 for contributions since 2010, according to LSE.

Most of the transactions involved parents giving or lending money to their adult children; about half of the transactions were for deposits on house purchases, with the remainder used for mortgage payments, stamp duty and legal costs.

Two thirds (68 per cent) of assisted transactions were first-time buys, while 27 per cent were second or subsequent purchases.

Relatively few who offer financial help will channel it through a specialist financial product such as a family or guarantor mortgage, or a joint mortgage, even though such products can be advantageous for both parties, LSE reported.

Of the 11 per cent that said they had supported a family member's mortgage, 3 per cent acted as a mortgage guarantor, while 2 per cent had taken out some kind of family-assistance mortgage (where a proportion of the mortgage loan is secured on the parents’ house, or where the parents deposit a sum of money with the lender).

Just 1 per cent mentioned a joint mortgage.

Some interviewees, including both customers and professional stakeholders, were concerned family parental help could be fuelling house price inflation - although financial intermediaries saw the effect on property prices as small.

A number of respondents saw the need for parental help as a symptom of broader-based problems in the housing market.