The UK’s best lender is the bank of mum and dad
While the Bank of Mum and Dad must be one of the financial media’s favourite clichés, like many cliché’s it’s grounded in truth. Even with a university education leading to a professional job, today’s generation of young people can struggle to save the hefty deposits needed in the modern housing market while also paying rent. Unofficial “bridging loans” (or straightforward advances on their inheritance) can go a long way towards helping young adults to get the keys to their first home. If you’re a parent contemplating assisting your child with a housing purchase, here are some points to consider.
Do your sums thoroughly before you speak to your child
Look after yourself first. It isn’t selfishness, it’s self-care, which is very different. If you wind up giving your child a sum of money which will (or could) leave you financially stretched (even if the child agrees to pay it back), then you risk laying the ground for all kinds of problems from the entirely practical to the emotional. Do your sums thoroughly, so that you only offer money you are sure you can live without, not just in a best-case scenario but also in a worst-case scenario.
Set expectations clearly right from the start
In addition to deciding how much you can afford to give your child, you also need to decide whether the money is a gift or a loan and if the latter on what terms it will be given. This may seem like a harsh comment, but loans between family members can be fraught with pitfalls even if they’re documented in such a way as to make them legally-binding contracts. Let’s be honest, as a parent if your child fails to pay back a loan as agreed, are you really going to take legal action against them? What if they experience a negative life event (sadly it can and does happen) and genuinely can’t pay it back, at least not in the time agreed, perhaps not ever? On that point, if you do decide to advance money in the form of a loan, it is a very good idea to document this formally, rather than just “taking it on trust”. That way, if your child does run into financial difficulties, you will have a claim on their funds in the same way as any other creditor (and it is entirely up to you what you do with any funds you are given from their assets, you can give it straight back to them if you wish), whereas an undocumented loan is very likely to be ignored in any insolvency process.
Think about how your actions will impact other people
In principle, you can, of course, do whatever you like with your own money. In practice, however, other people will have an opinion on your actions and sometimes this is entirely understandable. In particular, if you have more than one child, being fair to each of them can be more complex than it sounds. From a purely mathematical perspective, you could just give (or loan) the same amount of money to each on the same terms (although if you were going for real mathematical precision, the money would have to be given at the same time to negate the effect of changes to interest rates and inflation). Life, however, is about more than mathematics, for example, if one child went to a traditional university and received financial support from you during their studies, while the other undertook an apprenticeship and paid their own way, would it really be fair to give them both the same amount of help towards a deposit on a property? That’s a question only you can answer, but it’s definitely worth consideration.
The FCA does not regulate some forms of bridging loans.
Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
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