Tuesday, December 20, 2022

The Bank of Mum and Dad begins closing up shop as the parents struggle with their own finances

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Fewer parents are now willing or able to help their offspring buy their first home—the baby boomers have their own money worries to deal with

According to financial services giant Legal & General, five and a half million parents helped their children buy their first home last year, making Bank of Mum and Dad the 10th largest lender in the country.

But as bleak as the current outlook for first-time buyers is, there are signs parents may need to rein in their lending as baby boomers are now struggling with financial problems of their own.

Nicholas Mendes of independent mortgage broker John Charcol has found a 20 to 30 percent drop in parents giving away deposits or sponsoring a mortgage application.

“The Bank of Mum and Dad is concerned about entering into an agreement if the cost of living continues to take its toll,” he said. “Parents are aware that house prices may be falling, they’ve seen how volatile mortgage rates have been over the past few months and they don’t want to overspend. They want to protect their money.”

The proportion of first-time buyers who receive help from family members has already started to decline. Two years ago, 34 percent of first-time buyers said they used a gift or loan from family or friends to fund their investment. Last year that figure fell to 23 percent, according to the latest figures from the English Housing Survey commissioned by the Department for Leveling Up, Housing and Communities.

Meanwhile, a recent Santander report found that 54 percent of first-time buyers felt the Bank of Mum and Dad was less able to support their home purchase.

In uncertain times, parents must prioritize their own financial future and balance the desire to help their children with the need to have enough money to spare for retirement given the rising cost of living and the cost of adult welfare.

“Uncertainty about care reform means that the risk of needing care later in life comes with a potentially unlimited bill, which inevitably makes people shy away from parting with too much money,” said Sarah Coles, personal finance analyst at Hargreaves Lansdown.

First-time buyer Tayla, 23, and her partner Joe recently bought a three-bedroom semi-detached house in Bedfordshire without the help of their parents.

“We both come from loving families, but they couldn’t afford to financially support our purchase,” said Tayla, an account manager. “Their way of helping was by letting us live in their home rent-free, which was great because it allowed us to save.”

The couple saved a 20 percent deposit and fixed their mortgage for five years just before interest rates started to rise.

“We’ve been working during the pandemic, and by not going out or paying bills, we’ve been able to save massively,” Tayla added. “After the pandemic, we used every penny we saved to buy our first home.”

Mortgage adviser and broker Sally Mitchell, known as “The Mortgage Mum,” says many of her young prospective buyers are postponing their search, hoping for a match in home prices and rates. “I think they realize that the bank of mum and dad is a little bit dry,” she said.

“I have a client who was rescheduling because her fixed rate is going to expire in a few months. Her plan was to raise some equity at the same time to help her son buy his first apartment. By the time we looked at her options, the installments had skyrocketed and she just couldn’t afford the higher monthly payment.”

James Greenwood of Stacks Property Search notes that a quarter of acquisitions on the company’s books that involve parental funding have been shelved.

“Our buyers in this sector have pressed the pause button until there is some clarity from the widespread uncertainty surrounding house prices, interest rates and assets,” he said.

He quoted clients who didn’t help their daughter buy a flat in London because they didn’t take into account monthly mortgage rates, which climb to as much as six percent.

“Parents are concerned about how their invested funds are performing, whether the price of their home is likely to decrease, how the housing market in general will develop in the coming years, and whether their children will be able to service a mortgage,” he added.

“Buyers in this position should be very accountable and realistic about anticipating worst-case scenarios. We are not surprised that some are keen to see how things play out over the next few months, with a view to a re-rating in January.”

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