HAVE you thought about planning ahead to help your son or daughter on to the property ladder, in a few years’ time?
Why am I thinking of this today? A colleague here has just returned from a holiday in Rome with two overwhelming impressions of Italian life.
First, he says Italian drivers should never, ever have been let in on the invention of the motor car. Second, more than any other nation in Europe, the Italians are strongly into family and children.
So let’s talk about helping our children, and specifically, helping them to buy their first home.
New findings by Legal & General show the importance we parents have in helping our children get on the dreaded property ladder, at a time when this is more difficult than ever before. Therefore we may want to start planning or saving now, even though our children might not be leaving the nest for some years yet.
There’s even a zippy word for parents who help out with a few bob, when the time comes. We are the most invisible financial institution around: Bomad, “the Bank of Mum and Dad.”
Bomad might not have a swanky window full of posters on the high street, but L&G say it will fund 26 per cent of house deposits in the UK this year.
That means parental pockets will provide deposits for 298,000 mortgages, with an estimated total contribution of £6.5 billion. And Bomad is a concept that is really thriving in the current adverse house buyers’ market: that sum is up 30 per cent in the last year.
The need for financial help from mum and dad is likely to continue to rise. In 2016, a third of prospective buyers expected some help from their parents with their property purchase; that rose to nearly half (48 per cent) last year.
If we focus just on the under-35s, it’s even higher. L&G estimate that 62 per cent buying a home needed some form of financial help from their family.
Ah, it’s not like the old days. Did you know that the first mortgages back in the 1930s were for just two times your annual salary? They took less than 10 per cent of your earnings, and were usually paid off in 15 years.
Those days are gone. Today your mortgage is closer to four times your salary, taking 20 per cent of your income, and usually requires two people living together.
A bit of forward planning, therefore, can work wonders. For instance, it can save you from having to face uncomfortable choices, when the time comes.
Legal & General predict that pressure on parents who do not plan ahead may force them to resort to equity release on their own homes, in order to help their children buy a house.
In their words: “The Bank of Mum & Dad is a caring bank, and it will always try to do more. We’d expect the small minority – just 3 per cent - currently using equity release to grow in coming years, as more people strain to help their loved ones on to the property ladder. However, they can’t do it alone, and as prices continue to rise, the economic strain will begin to show.”
If you act now, you could reduce or avoid that ‘economic strain’.
You could set up an Isa in your own name, to put away money earmarked for your child’s house deposit. Then there are a few innovative Isas that can be opened in their name, once they turn 18, and you can contribute into those.
The Lifetime Isa allows you or your child to save up to £4,000 a year towards a deposit on their first house, or for saving for old age.
Then, exclusively for first-time home purchase, there’s the Help to Buy Isa, where they can save up to £3,400 this year.
The good news about both these Isas is that the government adds a ‘top-up’ when you come to take your first mortgage.
It does this by adding 25 per cent to your contributions: for every £4 you save, the government adds £1 to top it up to a fiver. Now, the Help to Buy gives the 25 per cent only up to £12,000 of your savings, but that’s still a great £3,000 bonus to bring you to £15,000.
If the money is going to be in the Isa for ten years or more, it could be worth considering a stocks and shares Isa, slightly more risky but with a real chance of a higher return.
We all want the best for our children, and a little financial advice today can really translate into their own roof over their head in the future.
We may not be in Rome - but let’s do as the Romans do!
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005 . Further information on Facebook at “Kennedy Independent Financial Advice Ltd”
