The so-called mom and dad bank has become increasingly important to first-time buyers in recent years. As real estate prices continue to reach historic highs, it will get even higher. The Bank of Mum and Dad now symbolizes the growing inequality of inherited wealth in Britain. Today, there are two types of first-time buyers: those who have family money and those who do not.
Estimates of the total value of family assets entering the UK housing market vary. According to the Legal and General Bank of Mum and Dad, it typically borrows around £6bn a year, equivalent to the UK’s ten largest mortgage lenders. Estate agency Savills said combined loans from Mummy and Dad’s Bank were even higher at £9.8billion in 2021, and claims it backed around half of all home purchases by the former buyers.
The transfer of assets from parents and grandparents to first-time buyers is generally presented as a solution to intergenerational inequalities in the housing market.
But it’s actually a symptom of a problem: Older people took advantage of falling house prices in the 1970s or mortgage deregulation in the 1980s and saw their homes value in the 1990s and 2000s, as young people struggled with rising house prices, rising rents and tighter credit restrictions.
Stricter lending criteria after the 2008 global financial crisis increased deposit requirements for first-time buyers. The new rules restricted the amount they could borrow even if house prices continued to rise above wages.
Mom and Dad’s bank presents a serious economic problem. Parents and grandparents are not banks. It’s not just that mom and dad’s bank is made up of very wealthy old people who give alms to their offspring.
Although there is no official data, I have heard countless stories of retired parents donating part of their retirement capital to help their children and even taking out loans or borrowing again on their own home later in life to free up money. According to a study by MoneySuperMarket, one in six parents who used this before the pandemic as an opportunity to provide financial support for their children.
This, notes Legal and General, “weighs on their own financial future” as they may need money to live on in retirement or, more importantly, to help with adult welfare costs. Neal Hudson is an expert in housing market analysis. He says that if families borrow to help younger members, they may also run the risk of increasing interest rates in old age.
As house prices continue to reach record highs in the wake of the economic crisis linked to the costs of basic commodities such as food and energy, this should be of greater concern. I recently heard of a young couple who were surprised when half of the couple’s grandmother called them asking for a refund of the £20,000 she had given them as a ‘gift’ to help them buy their first home. Why? She began to have financial difficulties and feared for her growing expenses. They panicked because they didn’t expect to have to return it and they didn’t have that money on hand.
I also spoke to a young woman in her 30s from Essex who works in education administration whose mother had taken the pension money to help her with bail. She told me she felt “guilty” and worried that her mother would need a refund one day and she wouldn’t be able to afford it.
Hudson adds that Mom and Dad’s Bank reinforces regional and class inequalities. “The deposit you need to buy in London and expensive parts of southern England like Oxford, Cambridge and Brighton is much higher.”
Home ownership continues to be at the top of the political agenda. At the start of his term as Prime Minister, Boris Johnson made it clear that he wanted to convert ‘generational rent’ into ‘generational buying’. But while home ownership remains a political priority, it has reached its lowest level in a generation. At just 64.9% in the 2020/21 season, our property is back to mid-1980s levels and well below its 2003 high of 70.9%.
So what to do? A new report from economist Ian Mulheirn of the Tony Blair Institute for Global Change says the only way to increase homeownership in the UK is to reform how mortgage finance works, making it easier for first-time buyers – no matter how much the money the parents have to borrow.
“Since the financial crisis, borrowing has been taken away from young people, people with fewer deposits and generally less wealthy,” he explains. “And these [first time buyers] who manage to buy with smaller deposits end up paying a higher interest rate, so they are effectively fined and paid a premium because the banks perceive them as riskier. »
This is why Mulheirn calls for credit reform. “It doesn’t have to be like that,” he says. “The UK is lagging globally in how effectively we manage this risk. Lenders here are cautious and regulated, but for example, if we look at Canada, Australia and the Netherlands, we can learn a lot. There, as a rule, they have mortgage insurance programs and longer-term mortgages. All of this improves affordability and protects people against future interest rate hikes, and helps young people with small deposits to move up the housing ladder.
Mulheirn also echoes Hudson’s concerns about the vulnerability of older people who have borrowed or retired from their own homes or retirement savings to support younger family members. “If people take on more mortgage debt, they have to think about the risk of rising interest rates,” he says.
Many things affect home ownership, not just house prices. However, since 2008, a significant factor has been the cost and availability of mortgage financing for first-time buyers. Until the system is democratized, the UK housing market will continue to be segmented along class lines between those who have access to family assets and those who do not. As interest rates rise, this can become costly and create new problems for seniors who have used their help to take out loans against future collateral.
Vicky Spratt is Housing Correspondent and