What does the Bank of Mum and Dad need to consider?

With the furlough scheme winding down (and finishing at the end of October) and with an increasing number of redundancies being announced, the Bank of Mum and Dad is being asked to step in on a more frequent basis to help their adult children with their financial commitments.

Parents are increasingly seeing their children’s debt escalate, which can often be due to rent payments. Under coronavirus legislation, private landlords have to give their tenants 3 months’ notice to quit but nevertheless the payment is still due. If you lose your job, this can be an issue. While homeowners can take a mortgage payment holiday and add the debt to the end of the mortgage, tenants have to repay what they owe much more quickly, even if they have agreed a schedule with their landlords. Housing benefit is often unlikely to cover the full rent. With no source of income on the horizon, grown-up children may resort to requesting a parental bailout.     

Shared houses can also be an issue. If one of the occupants decides to ‘disappear’ as they are behind with the rent, it leaves the other housemates to cover the arrears. This is a particular issue if the parents of one of the remaining tenants had agreed to act as rental guarantors at the outset.        

Helping with house purchases can also have some issues. Many parents are keen to help their offspring to get a foot on the property ladder. According to Legal and General, the average contribution by the Bank of Mum and Dad rose by more than £6,000, to £24,100 in 2019. This put it in the top 10 of UK mortgage lenders, with parents having given £6.3 billion collectively.

In the current climate, especially with many high Loan to Value (LTV) mortgages having been withdrawn, parental input can certainly help. But when parents may be facing financial difficulties of their own, are they going to be as willing to keep on lending and gifting deposits?

Some parents may decide to hold fire in the hope that more properties may come onto the market or prices may drop. Others may decide that if it’s been a bit of a shock to the system having a grown-up child suddenly back under their roof under lockdown, helping provide the funds for a quick house purchase may be preferable!   

If you do decide to act as the Bank of Mum and Dad, it’s important to make sure that you can afford it. If you’re using your pension, investments or savings to help out, consider what impact that will have on your own retirement. Whilst the natural instinct is to help your children get started, it is important to consider the implications of this when it comes to your own financial plans.

It’s also important to make sure it’s clear whether the money is a gift or a loan as this will have different tax implications. This also becomes important if your child is moving in with a partner. You may want a say in how the rights to the property will be treated should the relationship break down at some point.    

The Bank of Mum and Dad is becoming a very familiar financial lending institution. However, as with all lending, whether it be supporting debt or helping children to get started on the property ladder, it can have issues and we do encourage you to get in touch if you have any queries.