The growing role of the ‘Bank of Mum and Dad’ in property purchases

In recent years, the ‘Bank of Mum and Dad’ has become an increasingly vital resource for first-time property buyers.

Recent research by the Institute of Fiscal Studies (IFS) has revealed that half of first-time buyers now rely on financial support from their parents to secure deposits for property purchases.

The average financial assistance provided by parents totals £25,000, with this figure rising to around £35,000 for buyers whose parents are university graduates.

This support is crucial at a time when house prices and mortgage rates are unpredictable. Interestingly, mortgage rates have recently dipped below six per cent for two-year fixed rates, offering a slight reprieve.

Location really matters, with buyers in the southeast of England receiving the highest average gift of £31,000, compared to £18,000 in the Midlands and £17,000 in the north. However, only 29 per cent of first-time buyers with renting parents received help, averaging £11,000.

The impact of parental support

Each £1,000 gifted by parents enables first-time buyers to afford £10,000 more on a property purchase, assuming a 10 per cent deposit.

This support often stretches to a 25 per cent deposit, reducing the interest rate on the mortgage and making monthly payments more manageable.

Investments and savings strategies

For parents looking to support their children in property purchases, here are some useful strategies:

• Regular savings plans – Setting up a regular savings account specifically for this purpose can be a wise move. Parents can contribute a fixed amount monthly, benefiting from compound interest over time.
• Investment in stocks and shares ISAs – For a potentially higher return, investing in stocks and shares ISAs can be considered. However, this comes with higher risk, so it is advisable to seek financial guidance.
• Lifetime ISAs (LISAs) – LISAs are specifically designed to help save for a first home. They offer a 25 per cent Government bonus on contributions up to £4,000 a year, which can significantly boost the savings pot.
• Property investment – Some parents opt to invest in property themselves, which can later be sold to fund their child’s deposit. This approach can be lucrative but requires careful consideration of the property market.
• Gifts and loans – Direct financial gifts or loans can be provided. However, considerations should be made for Inheritance Tax (IHT) and Capital Gains Tax (CGT), which come into play when gifts or loans are given.

The increasing reliance on the ‘Bank of Mum and Dad’ reflects the challenges faced by first-time buyers in the current property market.

While parental support is invaluable, both parents and children should approach this with a clear understanding of the financial implications and consider various savings and investment strategies.

For advice on savings and investment strategies to help first-time buyers get on the property ladder, reach out to us today.