When it comes to naming the biggest mortgage lenders in the UK, most people would think of the major banks and building societies in the market today. Few would think to name the so-called Bank of Mum and Dad, and yet this is one of the biggest groups responsible for mortgage lending nowadays.
Legal & General has carried out a body of research that has revealed that one-quarter of UK mortgages will be at least part-funded by the parents of children looking to get their foot on the first rung of the housing ladder. While the loans made by these parents are counted individually, the stark reality comes when they are counted as coming from one source. If this were the case, the Bank of Mum and Dad would be in the top 10 of mortgage providers in the UK today.
A total of £5 billion lent this year
The research reveals that around £5 billion would be contributed this year alone. It also estimated that around 300,000 mortgages would have deposits paid for by the parents of the mortgagor. The total cost of all these homes put together is said to add up to around £77 billion.
Can this continue?
Nigel Wilson, the chief executive of Legal & General, pointed out that in some areas – most notably, London – the situation is reaching “tipping point” as parental contributions may not be able to rise much higher than they are already.
There is a clear level beyond which many parents would not be able to lend any more in the way of funds. Additionally, not all parents have enough money to be able to lend anything in the first place. Of course, there is also the prospect of some young people not having one or both parents to rely on for an extra financial boost.
Average contribution £17,500
The research found a wide variation in the amount contributed by parents in this way. However, the average came out to £17,500. This averaged out to 7% of the purchase price in each case.
Clearly, many young people are relying on their parents to help with the deposit for a property of their own. This seems to be the main area where the finance has the best effect. With super-low interest rates still applied to many mortgages, it gives young people a chance to get on the housing ladder and to pay relatively-low monthly payments on their mortgage at the same time.
The terms on which such contributions are extended will no doubt vary from one case to another. Whereas some might be given with no firm ideas on paying them back, others will be given in the form of an interest-free loan. It remains to be seen whether this rate of loans will continue from the Bank of Mum and Dad, or whether we are seeing the highest rate of contributions at present. If house prices continue to rise, so could contributions from parents.