How the Bank of Mum and Dad is helping first-time buyers

David Forsdyke at Knight Frank Finance talks about how older homeowners are increasingly helping the younger generations get onto the property ladder.

The ‘Bank of Mum and Dad’(often referred to as BOMAD) is becoming more and more important in today’s property market. According to research recently published by the Legal & General, three in every five under 35’s need help from parents, grandparents or other family members to help with financing their property purchases.

L&G reckon 316,600 purchases were supported by BOMAD in 2018, and they expect BOMAD lending to rise by 10% in 2019, supporting 1 in every 5 purchases.

Not all of these purchases require Mum & Dad to borrow money, but for those who have their wealth in their property, Equity Release can be an effective way of releasing funds and helping their children out.

At Knight Frank Finance, we have recently advised a number of clients who are raising money through Equity Release to help their children. Loans have ranged from £37,000 up to £1,600,000. Many clients see this as a gift to their children: a so called ‘living inheritance’ where they want to see their family benefit from the wealth they have built up over the years.

The cost of Equity Release has dropped dramatically in the last few years, and interest rates are now much closer to the conventional mortgage market than ever before.

Things to consider

There are of course lots of things other than cost that you must consider if you are thinking of taking out Equity Release. Equity Release cannot be bought direct from a lender.

The Regulator (the FCA) requires that such products be recommended by a professionally qualified Equity Release adviser. This means you will go through a careful advice process to make sure it is suitable and appropriate.

The Equity Release Council, who are the trade body for this market, also set certain requirements which both lenders and advisers must meet if they are members. All of this provides a reassuring level of consumer protection around the whole transaction. If you are gifting the money to your children, and therefore don’t expect them to pay you back, you may also want to seek advice from a tax specialist (in case of any IHT implications) and Wills and Estate Planning experts.

It is really important you understand the advantages and disadvantages of Equity Release before you go ahead. For example, Equity Release is typically taken using a Lifetime Mortgage which allows interest to roll up. So unless you choose to pay the interest, your mortgage will gradually get bigger over time and this may reduce the value of your estate.

This could mean leaving less for your children and other beneficiaries when you eventually pass away. It is really important you think about your future needs and discuss them with your adviser. Equity Release can be set up on a very flexible basis, which is great if you’re expecting your circumstances to change.

Finally, don’t let your children put you under pressure to help them, especially if it’s at the detriment of your own financial needs and future goals.

If you are over 55 and are thinking about Equity Release, speak to a member of our Later Life Finance team. All Later Life advisers are qualified in Equity Release and we have access to a wide range of products tailored for older homeowners. You can contact us on 0203 918 7259 or visit our Borrowing Into Retirement pages.