Is Housing Dependent On Bank Of Mum And Dad?

‘The Bank of Mum and Dad’ (BOMAD) is set to become the 11th largest financial lender in the UK, highlighting its importance in the property market.

There has been an increase in financial support from the BOMAD as older relatives offer loans worth a collective £6.3 billion to the younger generation.

Research conducted by Legal & General and the Centre for Economics and Business Research (Cebr) revealed that 62% of aspiring homeowners under the age of 35 are reliant on parental support to finance their first home move.

Even older children require support with over a fifth of people aged between 45 and 54 requiring financial help from their aging relatives too.

This year alone, the BOMAD will help the younger generation, who are becoming increasingly dependent on their older relatives for help, buy property worth in excess of £70 billion.

Today’s Conveyancer asked professionals in the sector whether they think millennials are becoming too dependent on the help of their older relatives for financial support when buying property, how housing dependency on BOMAD could be stopped and what the mortgage sector could do to help avoid BOMAD lending.

John Jones, Head of Conveyancing at BBH Legal Services Limited said:

“In light of rising house prices, structural issues within the housing market and restraints on person’s finances it is more than likely that the ‘Bank of Mum & Dad’ (BOMAD) will continue to feature heavily for the foreseeable future.  In my own firm, nearly a third of all transactions involve a BOMAD gift or loan, at some level, from parents, grandparents or siblings. This help is not limited to purchase cases but extends into remortgages and transfers of equity. Our first-time buyers often use BOMAD to get on that first rung of the housing ladder but we see it also with ‘second-steppers’ needing to upsize and in matters where couples have separated or divorced.

“In its November 2018 report “Building on the Bank of Mum and Dad”, the Building Societies Association remarks that “Critically, we recognise that the Bank of Mum and Dad – widely defined – is already playing a positive role, and that building societies are well-placed to promote and to broaden its contribution in future years”. Does this suggest that borrowers are becoming overly dependent on BOMAD to ensure their transactions go through? For most people home ownership is more than an aspiration but an expectation. They want a housing market that meets that expectation. Unfortunately, that is not always the case. What message did the Government give to aspiring homeowners when in 2017 it published a White Paper entitled “Fixing our broken housing market”?  Individual borrowers cannot impact the housing market but in relation to their own transactions, they can and do take matters into their own hands. Mortgage finance is available to them, and initiatives such as ‘Help to Buy’, but these do not always cover the full cost of purchasing or remortgaging their homes. Borrowers therefore have and will continue to look to family members to help them provide the necessary additional funds. More so, those family members want to help.

“It is clear that the mortgage sector is conscious of the impact of BOMAD on its market. In the BSA report mentioned above, it recommends that lenders do more to promote and educate borrowers on the different ways home ownership can be achieved. It also encourages lenders to be more innovative in its underwriting and the products it sells. It also stresses the need to lobby the “Government and financial regulators to reconsider the policy that has been adopted on testing stress within the housing market against “… economic reality and social objectives.”. From a conveyancer’s perspective, we ask that lenders make it clear in their mortgage offers that BOMAD is a feature of the transaction, that the lender has already agreed to it, and has carried out satisfactory due diligence around the family gift or loan.

“The housing sector can do more and there is clearly an appetite to improve it. Will such changes reduce the role of BOMAD. I doubt that will be the case. Improved access to housing, more help for first-time buyers and those down-sizing, being more innovative around SDLT and LTT, streamlining the conveyancing process and rethinking ‘affordability’ criteria around mortgages will all aid borrowers and may well reduce the perceived dependency on BOMAD but it is unlikely to disappear altogether.”

Paul Sams, Partner at Dutton Gregory Solicitors further adds. He said:

“I need to be careful about what I write about millennials as the last time I wrote about that generation I was subjected to a fair amount of criticism for merely pointing out that they had little chance of inheriting any money before the age of 55 years of age to help with their purchase.  Having said that any parent naturally wants to help out their children.  Whether that is financially or otherwise it is in our DNA as human beings to do so.  My parents helped me with my first purchase (they covered the cost of the stamp duty mind you stamp duty started at £60,000.00 back then and was at a lower rate than now).

We are not going to replace parents helping their children.  Society won’t stop it as they actually feel obligated to or just want to.  If lenders went down the route of 100% mortgages again I would have my reservations having seen the problems the last time.  The 100% mortgage schemes last time were flawed in my opinion as the unsecured part of the loan was too low.  Perhaps lenders could consider having a 75% secured element to the mortgage with 25% unsecured.  Now, this is still 100% of the value of the purchase price but all parties have a better chance of settling matters if property prices take a big decrease.  An alternative could be that a higher percentage is provided by a main lender and a lower percentage is provided by a third party lender. Something akin to a private help to buy scheme.

Lenders are going to be cautious with political and economic uncertainty on the horizon.  I am not sure they can do more than they are without risking the ire of politicians and journalists accusing them of being greedy.”

As a Conveyancer, what is your opinion? Do you think millennials are becoming too dependent on the help of their older relatives for financial support when buying property?