Data from Legal and General (L&G) has revealed that parents will lend £5bn to their children in 2016 to get them onto the property ladder. The so-called Bank of Mum and Dad will help to finance 25% of all UK mortgage transactions this year, which on average amounts to £17,500. This year over 300,000 transactions on property will be part-funded by parents and older relatives. The amount young people are borrowing from parents, if combined into a company, would be equivalent to a top 10 UK mortgage lender.
The Bank of Mum and Dad is estimated to be involved in a quarter of all transactions; this highlights the extent to which parents and relatives are holding up the housing market. The price of houses in the current market is considerably out-of-sync with wages and this funding method cannot continue to be the norm. This trend looks to increase the inequality of the housing market and is shutting out those who are from less advantageous backgrounds.
Whilst there are tax advantages to gifting assets to children as a way to mitigate tax liabilities, the level of money being lent for property will reach a tipping point in the near future as more than half of an average household’s net wealth (excluding property assets) is being used by parents to assist their children. At present, 57% of financial assistance is gifted and only 5% of cases require the beneficiaries to pay back interest on top of the original loan.
It is also worth considering that individuals are living longer and the money being invested in property could be needed for unexpected care costs. Experts are warning of a ‘funding crisis’ which could open up by 2035. In order to rectify this problem, the housing market needs to revolutionise the supply side; if more houses are built, the demand can be met at a sensible level. This should, in turn, mean that house prices stabilise relative to wages.