Why the property rally is down to Mum and Dad

The Bank of Mum and Dad will be a major driving force behind the recovery of Britain’s housing market as buyers struggle with the economic impact of Covid-19, according to a major study of the way property transactions in the UK are funded.

Almost one in four sales will be backed by family finance this year, data from Legal & General and economic analyst the Centre for Economics and Business Research (CEBR) suggests, with a quarter of borrowers now more reliant on financial support from loved ones as a result of the economic impact of the pandemic.

Despite the effective closure of the housing market and a wider collapse in purchases report by HMRC in the first half of 2020, the Bank of Mum and Dad – along with grandparents and even siblings and friends – will provide £3.5bn, or an average of £20,000 per purchase, to assist buying 175,000 homes worth more than £50bn this year.

However this is less than half the amount lent or gifted in 2019, which saw 85,000 more homes purchased with this kind of help.

“For years buyers have been faced with a limited supply of affordable homes. A challenge which is now being compounded by Covid-19,” warns Nigel Wilson, CEO at Legal & General.

“Not only are buyers facing an uncertain economic future, but changes by lenders in the wake of the pandemic have restricted the low-deposit mortgage options on which many young people rely to make their first step.

“While the Bank of Mum and Dad is leaning in to help those lucky enough to have its backing, a generation of hopeful buyers without the support of BoMaD could find themselves locked out of the housing market.”

It’s a perfect storm for those without a decent deposit – with or without parental support. Mortgages with a 5 per cent deposit are practically non existent. Those that are still open for business often require applicants to be from specific professions or lending areas, and many of the remaining options require a guarantor. Even borrowing with a 25 per cent deposit sitting in the bank is increasingly tough.

And Zoopla recently reported that properties are now selling faster than they did before Covid-19 hit. In other words there’s little slack on the bricks and mortar side to ease affordability constraints either.

“Whilst the generosity of the Bank of Mum and Dad is undoubtedly helping hundreds of thousands of loved ones to realise their homeownership goals every year, it remains a symptom of our broken housing market,” adds Wilson.

“In order to make a meaningful difference and to create a fair and long-lasting market dynamic, we need to become a housebuilding nation once again. Thousands of new and affordable properties, across a variety of tenures, are needed to give everyone a fair chance at homeownership.”

Beating the bank

Meanwhile, those parents, grandparents, friends or siblings who willing and able to help may find their generosity reaps some reward alongside the benefits for the buyer of getting off the rental hamster wheel.

“One route for a family to team up and help one take out their first mortgage is of course for the borrower to increase their level of deposit to 10 per cent of the purchase price. However, as rents have risen over the last year – and potentially may continue to do so – and savings rates have continued to plummet, this may feel impossible,” says Eleanor Williams, finance specialist at Moneyfacts.co.uk.

“Nevertheless, the Bank of Mum and Dad may be in a position to gift some or all of a deposit to their child to help them open up more choice in mortgage products in the slightly lower-rated 90 per cent LTV mortgages.”

With the HomeLet’s rental index now calculating the average rent at £951 per calendar month, the difference between that and the potential mortgage payment for those purchasing a £200,000 property could reduce a first time buyer’s outgoings by more than £230 each month, she suggests.

While the Bank of Mum and Dad themselves may not benefit financially from gifting some or all of this deposit, those buying their first home and swapping from the average rental payment to this monthly mortgage payment clearly would. Over a five-year mortgage term, this could amount to over £13,000 less leaving their pocket.

But with savings rates continuing their downward trajectory and current average rates across a wide range of accounts all below 1 per cent for the first time in decades, Mum and Dad may be struggling to get a competitive return on their own savings pot at the moment.

In which case Williams points to options like the 95 per cent Barclays Family Springboard mortgage. Coming in at 2.85 per cent for five years, it requires the borrower to put down 5 per cent deposit, with their family member then putting a further 10 per cent of the purchase price into a Helpful Start savings account – also for five years.

If all the mortgage repayments are met, the helpful family member will then receive their money back, with interest at the end of the five years at a variable rate – the Bank of England base rate plus 1.5 per cent.

Currently paying 1.60 per cent, this is 0.10 per cent higher than the top five-year fixed rate bond available on the wider market of 1.50 per cent as an expected profit rate from BLME (a Sharia-compliant bank that deals in this measure rather than interest rates).

“Of course, not everyone has family with large sums of money able to provide additional security for mortgage products such as these,” acknowledges Williams, who suggests one alternative could be a joint borrower sole proprietor mortgage, such as Saffron Building Society’s current offer.

Available to first-time buyers who are struggling with affordability for their own 95 per cent mortgage, this deal enables a family member to have their income taken into consideration towards any shortfall required to purchase the property, without having their name on the deeds.

Compared with typical rents, and based on borrowing £190,000 at the current product rate of 3.47 per cent, this would cost £100.99 less per month – a potential saving of £6,000 over the initial five-year fixed rate term.

The mortgage market a very changeable landscape, especially at the moment, and products are being updated constantly. Discussing home loan options with an independent broker would help first time buyers in particular navigate the various products and help make the most of the opportunities and savings available for individual circumstances.