Who will bail out the parents and grandparents who remortgaged or used retirement funds to help young people with deposits?
May 31, 2022 4:19 pm(Updated 4:20 pm)
The so-called Bank of Mum and Dad has become increasingly important to first-time buyers in recent years. As house prices continue to hit record highs, it will become even more so. The Bank of Mum and Dad symbolises the widening inequality of inherited wealth in Britain today. There are now two types of first-time buyers: those who have family money and those who do not.
Estimates as to the total value of family wealth trickling into Britain’s housing market vary. According to Legal and General, the Bank of Mum and Dad typically lends around £6 billion a year, which is the equivalent amount to that dished out by a top ten UK mortgage lender in the UK. Estate agency Savills put the Bank of Mum and Dad’s total lending even higher, at £9.8bn in 2021, and say it supported around half of all first-time buyer home purchases.
The transfer of wealth from parents and grandparents to struggling first-time buyers is usually presented as a solution to the gross intergenerational inequality in the housing market.
But it is actually a symptom of the problem: older people benefitted from lower house prices in the 1970s or deregulated mortgages in the 1980s and have watched as their homes have climbed in value in the 1990s and 2000s while younger people have struggled with rising house prices, rising rents, and tighter lending restrictions.
Tighter lending criteria following the 2008 global financial crisis increased the deposit requirements for first time buyers. New regulations have limited the amount they are able to borrow, even as house prices have continued to shoot up beyond earnings.
The Bank of Mum and Dad presents a serious economic problem. Parents and grandparents are not banks. It is not simply the case that the Bank of Mum and Dad comprises super rich old people giving their offspring handouts.
Though there is no official data, I have heard countless stories out there of retired parents giving chunks of pension equity to help their children and even taking out loans or remortgaging their own homes in later life to free up cash. Pre-pandemic, one in six parents who remortgaged used it as an opportunity to provide financial support to their children, according to research by comparison site MoneySuperMarket.
This, as Legal and General notes, “carries a cost to their own financial futures” because they may need that cash to live on in retirement or, crucially, to help with the cost of adult social care. Neal Hudson is an expert housing market analyst. He says that if families do borrow to help out younger members, they could also be exposing themselves to rising interest rates in older age.
As house prices continue to hit record highs amid an economic crisis revolving around the cost of essentials such as food and energy, this ought to be causing more concern. I recently heard from a young couple who were surprised when one half of the couple’s grandmother called them to ask them to return the £20,000, she had given them as a “gift” to help them buy their first flat. Why? She was beginning to struggle financially and feared for her rising outgoings. They went into a panic as they were not expecting to have to give it back and did not have that kind of cash to hand.
I’ve also spoken to a young woman in her thirties from Essex who works in education administration whose mother took money out of her pension to help her with a deposit. She told me that she felt “guilty” and was worried that her mum might need the money back one day and that she wouldn’t be able to afford to return it.
Hudson adds that the Bank of Mum and Dad reinforces regional and class inequality. “The deposit that you need to buy in London and expensive parts of the south of England like Oxford, Cambridge and Brighton is much higher.”
Homeownership is still at the top of the political agenda. Early on in his time as Prime Minister, Boris Johnson made it clear that he wanted to turn “Generation Rent” into “Generation Buy”. But while home ownership might remain high on the political agenda it has hit its lowest rate in a generation. At just 64.9 per cent in 2020/21, our home ownership level is back at mid-1980s levels and well below its 2003 peak of 70.9 per cent.
So, what to do? A new report from economist Ian Mulheirn at the Tony Blair Institute for Global Change argues that the only way to increase home ownership in Britain is to reform the way that mortgage finance works, making it easier for first time buyers – regardless of how much money their parents have – to borrow.
“Since the financial crisis lending has been tilted away from younger people, people with smaller deposits and essentially less wealthy people,” he explains. “And those [first time buyers] who do manage to buy with smaller deposits end up paying higher interest rates, so they’re effectively being penalised and paying a premium because banks see them as more risky.”
This is why Mulheirn is calling for lending reform. “It doesn’t have to be like this,” he says. “The UK is a global outlier in terms of how we manage these risks efficiently. Here, lenders are cautious and regulated but, for instance, if we look to Canada, Australia and the Netherlands we can learn a lot. There they have mortgage insurance programmes and longer fixed-term mortgages as standard. All of this improves affordability and shores people up against future interest rate rises and helps young people with smaller deposits to get on the housing ladder.”
Mulheirn also echoes Hudson’s concerns about the exposure of older people who have borrowed or withdrawn from their own homes or pension pots to help younger family members out. “If people are taking out further mortgage debt, then they do have to think about the risks of rising interest rates,” he says.
Many things affect access to home ownership, not least house prices. But, since 2008, the cost and availability of mortgage finance to first time buyers has been a huge factor. Unless the system is democratised, Britain’s housing market will continue to be divided along class lines into those who have access to family wealth, and those who do not. As interest rates rise, that could be costly and cause problems further down the line for older people who leveraged themselves to help by borrowing against their future security.
Vicky Spratt is i’s Housing Correspondent