Understanding the value of the Bank of Mum and Dad for first-time buyers

Richard Dana from Tembo Money explores how the Bank of Mum and Dad is becoming an increasingly important tool for first-time buyers, and looks at what new products are on the market for borrowers with and without family assistance.

First-time homeownership today

It’s no secret that first-time buyers today are struggling to buy their first home. Taking inflation into account, house prices in the UK have increased 227% since the 1970s. This paired with stricter lending criteria, and the increasing cost of living has meant that there are fewer first time buyers in the market than ever before. In fact, the average age of a first-time buyer in the UK today now sits at 34. That’s an increase of 6 years since 2007, when the age of an average first time-buyer was 28.

One of the biggest barriers that first-time buyers face is the ability to save a large enough house deposit. The average first-time buyer in the UK needs a deposit of £59,000 to get onto the property ladder, a number that rises to £132,685 in London.

Alongside the need for large sums of money to buy a property, comes the huge affordability gap that many face. For more than 20 years the cost of homes has outpaced the average rise in earnings. This imbalance is clearly evidenced in these numbers:

- The average house in March 2021 cost 65 times more than in January 1970.
- Comparatively, wages are only 35.8 times higher.

With most lenders lending between 4-5 times earnings, but the average home at 8.5 times earnings, it’s clear there is a huge affordability gap for many Britons.

Understanding the impact of the generational wealth gap

It is well reported that there is a stark generational wealth gap in the UK. Due to increasing house prices, inheritance and final salary pension schemes, the older generations have accumulated the vast majority of the UK’s wealth. Since 2007, all of the extra wealth accumulated in the UK went to people over the age of 45 - with at least two-thirds going to those over 65. On the other side of the coin, younger generations have struggled to accumulate any of their own wealth. The FCA reported that those aged 18-34 years old and the self-employed saw the largest proportional increases in financial vulnerability in 2020, rising by more than 40%.

But with this wealth discrepancy comes a natural redress between the generations. The Bank of Mum and Dad was reported to have supported 49% of first-time buyers in 2021. Research by Tembo revealed that 66% of homeowners with children would be happy to help their kids onto the property ladder - with a further 18% saying that they would be willing to help, but they just can’t afford it.

The Bank of Mum and Dad

There is clearly an incentive for family to want to help each other into homeownership. However, up until now, there have been very few options for families to help each other unless they have access to lump sums of cash to contribute towards a deposit. So, the Bank of Mum and Dad remains out of reach for many homebuyers, despite the fact that their families would be keen to help. In recent years, traditional guarantor mortgages have become increasingly rare, and only available at a limited number of lenders.

Thankfully, this rising generational wealth gap has led to the arrival of a range of new innovative products. These help make the Bank of Mum and Dad more accessible; it’s no longer a luxury only afforded to those whose families have access to large sums of cash.

A joint borrower sole proprietor (JBSP) mortgage has become a popular option for those buyers who need help closing the affordability gap. The buyer can add a family member’s income (this can be pension, or earnt income) to their mortgage application. This increases the amount that the buyer can borrow. The family member helping out does not have any ownership over the property, but is listed as a joint borrower, and is liable for the mortgage payments alongside the buyer.

Another alternative that families have been considering is releasing capital from an existing property to gift to children as a deposit. Using a retirement interest-only mortgage or a remortgage, older family members have been able to release some of the equity that has built up in their property over the years, to gift to children so they can build a big enough deposit to buy a property.

Alternative products that are on the market for those without family

Whilst the Bank of Mum and Dad seems like a great solution to get onto the property ladder, not everyone has access to it. There has been a growing number of alternative options for these buyers who do not have the family support that many have. These include private equity loan schemes and gradual ownership providers. The equity loan is offered by various private companies, with each one having slightly different criteria and interest rates. Private gradual ownership providers operate in a similar way to the government’s Shared Ownership scheme, allowing buyers to get on the property ladder without a full property deposit.

Conclusion

As house prices continue to rise, and wages continue to stagnate, more first-time buyers than ever are going to be locked out of the property market. The wealth gap between the generations will continue to grow as existing homeowners continue to see equity rise in their homes, while the young struggle to save for a deposit or come up against the ever widening affordability gap.

There is a clear indication that family members are keen to help the young onto the property ladder - with 49% of first-time buyers getting help from the Bank of Mum and Dad in 2021.

Many families do not have cash to hand to give to their children, but the Bank of Mum and Dad is becoming increasingly accessible. Family members hoping to support a loved one onto the property ladder can now lend a hand using their income or property, through next generation guarantor mortgage products that have come to market.

In addition, there are alternatives on the market for those without family support. Private equity loan and gradual ownership providers allow for those without access to the Bank of Mum and Dad to close the affordability gap, or buy incrementally, through private lenders.