Mothers in particular know instinctively when their offspring need a hand, though fathers too tend to have a (slightly more delayed) inkling when their assistance is required.
For most of us, our earliest memories are peppered with recollections of times when Mum and Dad were on hand to provide a much-needed lift and while the type of support parents give to their children changes over time, their willingness to provide it never disappears.
Understandably, parental assistance is required more frequently when their offspring are young: pre-school and school years are a time when the need for help and encouragement is constant. But this is what parents do: their love is unconditional. Assisting their children in any way they can is probably the parental handbook’s number one rule: “Be there whenever your kids need you.”
Later, as young adults begin flying the nest, heading off to university or leaving home to work, prompting mothers across the land to spend small fortunes on Kleenex tissues, the parental role changes. It becomes more advisory as we older folks endeavour to help our progeny benefit (or at least learn) from our experience; throughout, our advice remains underpinned by the unconditional love referred to above.
A few days ago, it was revealed that in 2022 more than 88,000 people, most of them young, first-time property buyers, took out a mortgage of at least 35 years. The figure represents an increase of 117% since 2018. By March of this year, almost one fifth (19%) of first time buyers were taking out ultra-long-term loans.
Since December 2021, borrowers have had to contend with a succession of interest rate increases, forcing many people to commit to long term loans in order to achieve lower monthly payments.
At the beginning of August, the Bank of England increased the base interest rate to 5.25%. With two-year fixed rate mortgage deals costing borrowers around 6.5%, it seems more likely that a rising number of people, most of them desperate to get a toehold on the property ladder, will be forced to accept longer mortgage terms.
An example puts the matter into financial perspective.
Let’s assume a couple, each aged 35, take out a 35-year term mortgage of £150,000 with which to buy their first home. Assuming an interest rate of 6.5%, their monthly repayments would be £906.23, or £10,874 a year. Granted, this figure may fluctuate during the course of their mortgage term depending on interest rate levels, but the couple will need to be confident they can afford to make their mortgage repayments until the age of 70, potentially dipping in to their pensions or retirement wealth.
A couple of days before the Bank of England raised base interest rates, it published a report which concluded that first-time buyers who receive financial help from their parents when buying a home benefit enormously in the form of a 10-year head start in the property market.
Furthermore, the Bank of England found that our first-time buyers are able to buy bigger houses sooner than those who rely upon a combination of savings and a bank loan.
A helping hand from parents has a positive knock-on effect said the Bank of England. Those who get a leg-up onto the property ladder are, according to the Bank, “…typically less leveraged and have lower mortgage payments, leaving more leeway for them to save or spend their incomes on other things.” This could prove extremely important should interest rates continue to rise.
Last year, the Bank of Mum and Dad helped some 170,000 first time buyers get onto the property ladder, contributing almost £9 billion to their children. It is estimated that more than a quarter of first-time buyers aged 25 and under will receive some form of financial assistance from their parents.
Of course, a large proportion of parents tend not to have a spare chunky sum of cash knocking around which they can dip into and give their children a much-needed leg-up. However, as the likelihood of 35-year (and longer) mortgages become the norm and people in their thirties and forties face the prospect of paying the loans off after they reach retirement, so-called ‘asset-rich but cash-poor’ parents can still lend a hand.
“One increasingly popular option for parents aged 55 and above who wish to give their children a helping hand to get onto the property ladder is to think about releasing part of the wealth built up in their home, usually over many years,” suggests Mark Gregory, Chief Executive of Equity Release Supermarket, the UK’s largest independent equity release firm.
“Effectively, equity release enables parents to give their children an early inheritance in the form of a lump sum with which their children can acquire a first home,” says Mr Gregory. “The recent research published by the Bank of England revealed that people who do not receive any financial support from their parents wait an extra decade to buy a comparable property to those who do receive support.”
This important point is re-iterated by Bank of England economist May Rostom who, referring to the Bank’s research, said that “Deposits are two and a half times larger, loans are 30 percent smaller and houses cost £15,000 more for those getting help compared to those who are not.”
Equity release enables older homeowners to release equity from their home as a tax-free cash sum. They may decide to pay monthly interest on this sum, or to make voluntary capital repayments, but there is no contractual requirement for them to do so.
Interest rolls up but is only repaid, in addition to the sum released, when the homeowner and their spouse (or partner) either die or are admitted into long-term care.
Accessing the wealth built up in their property could allow older homeowners to give their children an early inheritance, simultaneously offering them an opportunity to see the tax-free funds being put to use. No doubt homeowners would also experience a great deal of satisfaction, mindful that their cash contribution has helped save their children making up to ten years’ worth of mortgage repayments.
