Written by Caroline Culot.
The market is such that it is now common place for parents or sometimes even grandparents or other relatives to help youngsters in the family (in fact often not so young now) to get onto the ladder and buy their first home. Phrases such as the “bank of mum and dad” are now part of the popular property vocabulary. In view of this, recent reports show that parents pay an average of £38,903 towards the cost of helping their children get on the property ladder – it equates to 25pc of the total cost of a first time buyer property. And measures taken to do this by parents include sacrificing their own luxury purchases, withdrawing money from a pension or savings, downsizing their own property to release equity and taking on a new mortgage. I asked members of the N&DAEA their opinon on the subject – just what is the real cost to people of helping line an empty nest for their children? And should we not be encouraging the younger generation to consider renting instead of buying – taking a lead from other European countries which are not so obsessed with home ownership?
Tom Goodley, of Strutt & Parker inNorwich, said: “In my view many 20-something’s parents have benefited from enormous house price inflation, in some circumstances over 3,500pc in the last 30 years. If you look back at average salaries in the late seventies and early eighties and then at average house prices, the multiples were much less than now. “Unfortunately for people trying to get onto the property ladder now, there is no other option but to call on their parents and grandparents who may have seen the value of their house increase by over 10 fold if they have owned it for 25 years plus.”
Keith Hood, financial advisor at Warners, said: “I think most parents would want to help their children get their first foot on the property ladder if they can, not just because they want to see them settled, but I think as a nation we still aspire to owning our own home and believe that it’s a good long term investment. In addition if parents have cash in the bank they will probably be earning very little interest currently so may feel a bit more inclined to help out.
“If parents can help out then obviously borrowing a bit less reduces the monthly mortgage repayments, but in my experience often nowhere near as much as clients expect, for example, on a 25 year repayment mortgage with an interest rate of 4pc, the cost for each £1,000 is around £5.30 a month.
“However, generally the larger the deposit the lower the interest rate you are likely to pay, so the combination of borrowing less and getting a better interest rate can then make a really big difference. “So, yes, I would say it’s a very worthwhile thing to do for your children if you can afford to. But would I recommend parents increasing their own mortgage to raise cash for their children? “Personal choice of course and I would only recommend it if it was affordable, but there are also mortgage schemes available which allow parents to offer their own property as security to help their kids without increasing the parents’ monthly outgoings, unless something goes wrong and the kids don’t pay! The parents are effectively acting as guarantors and offering the lender additional security.”
JulieEngall, of Mills Knight, said: “We are finding that parents, who are financially able, are prepared to help their children onto the property ladder with gifting them all or part of the deposit required. “Many parents feel they would rather help their children out now when they can see them enjoy the benefits. Although people are now renting for longer periods I do believe that home ownership will continue to be more attractive in this country and that we will not move to a more European model where renting is more common than home ownership.
“In Europe tenants have far greater security of tenure compared to here, where after the initial agreed rental period of say six or 12 months the landlord can give the tenant two months notice, which leaves people feeling insecure and unwilling to make a property really into their home.”
And David Potter, of Potter & Co, agreed. He said: “Good luck to parents if they can help their children out, it probably isn’t the majority who can do that – especially when university fees etc are still owed.
“However as far as buying versus renting is concerned, it will never become a European model as long as the tenant in this country has no security of tenure.
“At present you can be evicted after six months, or with two months notice thereafter, so how can you settle down to a permanent home?
“The coalition are even talking about making council tenancies temporary. It was only because the security of tenure was removed by Mrs Thatcher that the rental market boomed in this country. “Landlords have control and the tenant must comply.
“So if you are settling down to have children, schooling, work or in old age and a settled retirement, the security that home ownership gives cannot be beaten.”