Bank of Mum and Dad: How to understand the long-term impact
Are you planning to give children and grandchildren a helping hand to get on the property ladder this year? If so, you’re not alone. As younger generations are struggling to purchase their first home, thousands of parents and grandparents are putting their hand into their pocket. But what does it mean for your long-term financial security?
Research from Legal and General suggests that family members offered gifts and loans to the tune of £6.3 billion in 2019. This generosity was estimated to support property purchases totalling £70 billion. Compared to last year, the total amount lent has increased by 10% despite the number of transactions falling.
Whilst gifting or lending loved ones the money to act as a deposit on their first home can be rewarding in itself, you do need to look at the long-term picture. The sums being handed over can be significant. In fact, the average amount passed down now stands at £24,100. In order to do so:
15% of over-55s have accepted a lower standard of living after helping family buy a home
21% dipped into ISA savings, 7% used their pension drawdown and 6% used income delivered from Annuities
16% unlocked housing wealth through a lifetime mortgage to provide financial support
In many cases, these steps won’t present an issue. But, worryingly, over a quarter (26%) of Bank of Mum and Dad lenders are not confident they now have enough money to last throughout retirement. 10% also said they no longer feel financially secure.
So, how can you financially help your family and still be confident in your own future?
Using cashflow modelling to understand the impact of a financial gift
Let’s say you’d like to give £20,000 to a grandchild to help them purchase their first home. It’s a sum you might have stashed away in a savings account or investment portfolio. It’s not something you need to use now to maintain your lifestyle.
But will giving that money away now mean you struggle financially in ten or 20 years’ time? Could it mean that the care you’d prefer if it were required is out of reach?
It’s not unusual to worry about the long-term impact of a lump-sum gift. Yet, it can be difficult to understand what that impact may be. This is where financial planning and using cashflow modelling as a tool can give you peace of mind. Cashflow modelling is a visual way to show how your wealth may change over time, demonstrating the consequences of different decisions. You can see how withdrawing a lump sum now could affect your income and assets over the short, medium and long term.
Often clients find they’re in a position to help their loved ones with a financial gift, and the financial planning process means they can do so with confidence in their future as well as their families.
Providing support if a financial gift isn’t an option
Should you find a financial gift isn’t an option for you, there may still be a way you can offer support. There are other ways in which you can help children or grandchildren make that first step on to the property ladder.
Provide a loan: Four in ten of those providing financial support to family members, require some form of repayment. If, after assessing your finances, you find you need the money at a later date, a loan can work well. Low-interest rates on mortgages mean family members that have been renting will often find outgoings reduce when they buy their own home, allowing them to pay you back. If this is the route you want to go down, be sure to take legal advice.
Look into offset mortgages: An offset mortgage is linked to a savings account. When money is placed in the savings account, it can reduce the amount of deposit needed and reduce interest rates. It allows you to provide support whilst still retaining control over your savings. You’ll usually still receive interest on your savings, so won’t miss out there. However, your money may be tied up for a defined period of time. You should research the different options to see how they fit in with your plans.
Use a family mortgage: A family mortgage allows children or grandchildren to borrow more or reduce the deposit needed by using your home as security. You’ll usually have to own your home outright, or owe relatively little on a mortgage, for this to be an option. Again, there are some important considerations here. If your child or grandchild defaults on their mortgage, you’ll be responsible too and could lose your own home as a result. Make sure those you’re helping can afford the mortgage and understand the implications it could have on you.
Reduce inheritance: If you have money earmarked for an inheritance, it may be worth looking at whether it would have a greater impact now or in the future. In some cases, your generosity could lead to loved ones having a financially secure future if it’s given now.
If you’d like to explore your options to help younger family members get on the property ladder, please get in touch. We’ll help you understand how a gift could impact your financial wellbeing, as well as what your other options are.