More parents are “wading into the financial details of their children’s marriage” according to industry experts, while others turn to equity release products as they seek to help their children onto the property ladder.
Caroline Holley, a partner at law firm Farrer & Co, said parents helping their children financially was a well-worn tradition, but it has become increasingly common in recent years with more parents putting greater thought and preparation into such support and how it can be protected down the line.
“Increasingly, we’re seeing parents raising concerns about how to protect funds provided to children, often to help them get on the property ladder, and this has led to more structured methods of releasing funds from the Bank of Mum and Dad,” Holley said.
She explained many parents now encourage their child to sign a prenuptial agreement before saying “I do” or, instead of providing an outright gift, which would be a liability in the event of a divorce, opt to enter into a loan agreement.
“As family homes are usually considered matrimonial assets in the event of divorce, parents are increasingly assisting with the purchase of other assets, such as investment property, to try and ensure these assets are ring fenced and protected in the case of divorce,” she said.
However, Holley warned that the English courts can still make an order contrary to the terms of a prenup, if fairness dictates it is necessary.
“If one party is going to be left without a roof over their head, then any attempts to ringfence and protect assets is likely to be trumped by the requirement to meet those needs as a priority,” Holley said.
At the same time, some lenders are seeing an increase in the popularity of equity release products as parents seek to support their children as first time buyers, giving them a financial boost while they are still alive rather than through inheritance.
Equity release
Canada Life’s head of marketing for insurance Alice Watson said that gifting accounted for 15 per cent of equity release completions in H1 of 2022 in the firm.
Watson explained that the trend for gifting is likely to grow, stating that it is “essential that advisers fully explain the lifelong nature of equity release and make sure interested customers understand the ins and outs of the product before purchasing".
Noting the same trend, Rest Less Mortgages chief executive Stuart Lewis said that while the bank of Mum and Dad has typically been funded by savings or excess income, two macro drivers have piqued interest in equity release for parents of young adults over the last few years.
“Firstly, from an emotional perspective the pandemic has made people reflect on what they want from life. People see their kids struggling to get on the property ladder and how hard the pandemic has been for many of them, so they are looking for ways to transfer wealth while they are still young enough to benefit from it.
“Secondly, from a rational perspective we have had, up until recently, historically low interest rates and surging house prices. These two factors alone have driven a lot of interest in equity release in a way that people who may not have considered it before were suddenly looking at interest rates and thinking differently about things,” Lewis told FTAdviser.
Citing a recent client where the couple was about to retire and wanted to raise some money to give to their three kids - one to pay off debts, one to help get on the property ladder and the other for university - Lewis said “this is something our equity release specialist has seen time and time again.”
Lewis also said that because of inheritance tax rules, clients with significantly large estates are interested in how they can efficiently manage their inheritance tax liability and “taking money out of the property for intergenerational gifting is one route people are looking at".
Highlighting some of the risks involved with equity release products, particularly around the interest rate, Lewis said that Rest Less Mortgages insists that people talk to their children before taking out the product, particularly if it is being used for intergenerational wealth transfer.
Meanwhile, Tembo, the digital broker that specialises in this area has seen increased interest in its products, with its propositions growing by 30 per cent per month over the past nine months.
A spokesperson for Tembo said that due to tightening lending criteria as a result of cost of living increases and economic uncertainty, the firm is seeing an increase in the number of customers who previously would have been likely to afford a first-time mortgage but now need assistance.
jane.matthews@ft.com
