Backing the ‘Bank of Mum and Dad’

Backing the ‘Bank of Mum and Dad’

Today the term ‘Bank of Mum and Dad’ is so regularly coined that it’s become a common turn of phrase, not only that but - according to research conducted by L&G - parents have collectively given their children £6.3 billion. 1.

Which means they are not just helping their children they are now an integral part of fuelling the economy, as they have become one of the biggest mortgage lenders in the UK – up there with big brands like Virgin Money and Clydesdale Bank.

The ‘Bank of Mum and Dad’ (which of course also includes guardians and any parental figure) is now an essential & vital part of our economy, and for many young people today, it is the only way to get on to the property ladder. And while the need for the ‘Bank of Mum and Dad’ is clearly strong, there are other ways to not only support a healthy savings lifestyle but also build on simple ways to save money and even start investing.

Quick intro: What is the ‘Bank of Mum and Dad’ and why do we need it?

If you’ve not heard the term before the ‘Bank of Mum and Dad’ is simply that. When parents lend, or give their children money / financial backing to buy their own property.

While unemployment rates for youth (aged 15-24) in the UK are low 2 getting a job is only a small part of the problem.

Often moving away from home to get a job, or for further education, is a must which commonly means paying high rent fees which makes saving difficult.

Sometimes zero-hour contracts can also be blamed as they prevent a steady income – making it difficult to judge how much can be saved realistically.

Between all of this, lifestyle demands and a general attitude to deprioritise saving, putting any cash away can either be out of reach financially or simply not on the agenda. And that’ where Mum and Dad come in.

Discussing and building a positive financial future – Advice for young people

Knowing where to start is half the battle. The best way to start is to set yourself a goal, define what you’d like to achieve and how much you need to achieve that.

Then it’s best to start to understand where you’re spending your money as that can tell you where you could make savings.

There are lots of great apps out there that can help you with this such as Money Dashboard, Bean and Emma. Once you’ve realised how much you want to save and where you can spare that money, even if it’s just one less take-away coffee a week, it’s time to look at where you put that money to help you save.

Cash ISAs are a simple and easy way to get started. Often they are quick to open, and you can use your tax free allowance to save up to £20,000 tax free per year, but if you want a long term saving and you’d like to see your money grow or provide returns there are a wealth of options out there including Stocks and Shares ISAs (the enhanced ISA offering), bonds and even funds – they are really accessible and great for long term investments.

However, if cutting out takeaway coffee isn’t going to cut it and you need to make serious savings it can be worth exploring the options you have with family. Having those big conversations can be difficult but here are a few helpful hints we’ve created to help you if you do decide to have those discussions:

1. Honesty is the best policy - It’s always worth being open about why you are taking the approach you’ve chosen and explaining your position fully.
2. Do the maths - Make sure you’ve worked out your options, so you can evidence and discuss your thinking. This way they know you’ve really considered your options and they may be able to help you find other solutions you weren’t aware of.
   
3. Try to find their comfort level - Try to see your request through their eyes. Sound out possible areas where there is a flexibility, perhaps you put a rough deadline when you move out, or when a loan must be repaid.
   
4. Consider a compromise - Think carefully about your ideal scenario and then also consider what else could help you that might be easier for them to say ‘yes’ to. After all, it’s good to have a backup.

Supporting and bettering financial outcomes for younger people – Advice for parents, guardians and carers.

As a parent the line is always a bit grey and knowing when to step in and offer help can be difficult. There ways to offer help without getting too involved. One great often forgotten way is to give them access to your Financial Adviser.

This is a simple way to ensure they are getting robust, impartial advice and it won’t feel like you’re stepping on their toes. This can help to set them up in the right direction to take their financial future in to their own hands.

If you’re confident about giving them the money to reach their goal, it’s worth noting that, right now, there are no immediate tax implications so you can give as much money as you like to your children tax free.

However, any gift you do give could be subject to inheritance tax if you pass away within 7 years.

If you’d prefer to find an alternative route to helping them, that isn’t handing over cash, you could also consider the following:

• Alternative mortgages – There are mortgages out there that can help young people get on the ladder with your support via the mortgage. This does mean there is a contract that both you and your child are bound to so it’s worth getting independent advice to consider the options.
• Alternative loans/ repayment options – There are lots of options here, to create agreements just between the family as well you lending the money with intent to repay on your child.

Lastly, it’s helpful and healthy to be open about money. While it can be difficult to open up about financial situations it can help to foster and reinforce a positive attitude to saving and help them know the boundaries should they ever need to ask for help.

1 https://www.bbc.co.uk/news/bus... - BBC - Mum and Dad are one of the biggest lenders in UK

2 https://commonslibrary.parliam... - Unemployment stats of youth June 2020

DISCLAIMER: Please remember, this article is just designed as a helpful guide and is in no way a replacement for Financial Advice from a reputable Financial Adviser. Please always seek advice before making any serious investment decisions.