First-time buyers (FTBs) are facing the most challenging conditions for 70 years and their ability to get onto the housing ladder is becoming ever more reliant on the so-called Bank of Mum and Dad, a new report has found.
In order to jump deposit and affordability hurdles, many couples need two incomes that are above average, as well as parental support.
Meanwhile, those who are single, on a lower income or without family help are being excluded from homeownership, according to housing analyst Neal Hudson in his research for the Building Societies Association (BSA).
We are racing even faster to a two-tier property market where only those with family help can get on
“Someone’s ability to become a first-time buyer is increasingly dependent on their good fortune in picking the correct family to be born into rather than on their own success in life,” says Hudson.
His point is borne out by the latest English Housing Survey, which shows that more than a third of recent FTBs had received a gift or loan from family members or friends.
In 2022–23, the percentage of buyers reporting that they had received financial help from family or friends reached 36%, up from 27% in the previous survey, for 2021–22.
Legal & General (L&G) found the Bank of Mum and Dad to be one of the UK’s largest lenders, giving or lending more than £8bn in 2023 alone.
“There is an inequality in who can manage to buy a home thanks to the underlying unaffordability of very high house prices relative to incomes, and to the regulatory environment,” says L&G.
The need for help from family reinforces existing regional and socio-economic divides
In England, for example, house prices have risen by 377% in 30 years, while average disposable income in the UK has increased by just 51%, according to the ‘Homes for All’ report — a separate study last month from a new coalition backed by the Church of England and Nationwide Foundation.
This divergence between house-price and earnings growth results in a widening funding gap that buyers need to plug from a source other than their wages — whether that be family help, a bigger mortgage or a government scheme.
For Shaw Financial Services independent mortgage broker Lewis Shaw, the Bank of Mum and Dad looks likely to remain a lifeline for FTBs.
“The upshot, however, is that we are racing even faster to a two-tier property market where those with family help can get on and those without will be consigned to the private rented sector,” he says.
If you look at the number of people needing support, it shows we’ve got a broken system
Hudson’s findings paint a similar picture of growing inequality that compounds over decades and generations between the ‘haves’ and the ‘have nots’ of the housing market.
“The need for help from family reinforces existing regional and socio-economic divides,” he says.
“The scale of the deposit needed in more expensive parts of the country requires a much better-funded ‘Bank’. As a result, those able to buy in these markets are more likely to come from families with higher socio-economic status and able to afford larger transfers to their children.”
Hudson adds: “A further driver of inequality in homeownership that is likely to rise in importance in coming years is inheritance.”
Those fortunate enough to get a financial leg-up from their family are likely to get on the housing ladder sooner, giving them more time to pay off their mortgage before retirement and a better chance of being able to help their own children, particularly if they inherit money from their parents at a later stage.
Our survey shows the emotional and financial strain the Bank of Mum and Dad puts on families
On the flip side, those without family support could find themselves saddled with higher housing costs into retirement, making it much harder to help their children onto the ladder.
“The funding of the Bank of Mum and Dad may be increasingly reliant on the grandparents’ legacy in coming decades, but exactly who ends up with it is far from certain,” says Hudson.
Knock-on effect
Even among those parents who are able to help their children, doing so is likely to come at a cost to their own lifestyle. A survey by HomeOwners Alliance found that 54% of parents had helped or expected to help their children in getting on the housing ladder, and 56% of this group said it would directly affect their own financial position (see data).
I’m not sure we need more innovation, so much as help for those who don’t have the fortune to fall back on the Bank of Mum and Dad
Among those who expect to support their children, 28% say this will mean dipping into savings or investments, leaving 13% concerned they won’t have enough money for the long term and 10% worried they may lack sufficient funds if they need long-term care.
Meanwhile, 9% say they may have to delay retirement, and a similar proportion say they may need to downsize in order to help their children become homeowners.
HomeOwners Alliance chief executive Paula Higgins says: “While we all know that the Bank of Mum and Dad is supporting many people’s first steps onto the housing ladder, what our survey shows is the emotional and financial strain it puts on families in today’s Britain.
The lifetime mortgage sector has suffered as a result of higher rates and this will undoubtedly have a knock-on effect
“Parents with adult children understand the importance of homeownership but are overwhelmingly worried, want to help more and feel guilty they can’t. Beyond the emotional burden, there is a worrying picture emerging of the impact this is having on older parents’ life.
“We found that many people were worried that helping may leave them financially short.”
Repeat assistance
Parents are also helping their children further up the ladder, according to Private Finance technical director Chris Sykes.
“Something really interesting we are seeing is the Bank of Mum and Dad stepping back in after previously helping out with a deposit or acting as a guarantor.”
This could be by paying off a lump sum to lower mortgage costs for children, or contributing to repayments.
BSA head of mortgage and housing policy Paul Broadhead says: “If you look at the number of people needing support from the Bank of Mum and Dad, it shows we’ve got a broken system.”
There has been more innovation to help borrowers who are struggling to meet affordability criteria
He believes that only a long-term government strategy — to boost housing supply and narrow the gap between house prices and wages — can address this.
In the interim, the industry has been working to treat the symptoms of the problem through innovation, says Broadhead.
“Many people are not in a position to give away sums of cash and we didn’t want to keep amplifying that two-tier system. So it was trying to see how, through innovative mortgage lending, we could support people to help their children or grandchildren get onto the housing ladder.”
The evolution from specialist guarantor products to joint borrower/sole proprietor (JBSP) as an option on many traditional mortgages has been part of this. Shaw says JBSP is becoming increasingly popular with clients.
“Almost half of all first-time buyers we speak to receive help from family members, and that figure has been steadily rising over the past five years. We’re now seeing more and more family members offering to jump on a mortgage with their children to support affordability, and JBSP is the route most take.”
Many people are not in a position to give away sums of cash and we didn’t want to keep amplifying that two-tier system
Another innovation Broadhead highlights is the development of products that allow parents to use some of the equity in their own home as security for a number of years, enabling their children to borrow at up to 100% loan-to-value. Mansfield Building Society and Tipton & Coseley have these products, called Family Assist Mortgages, which can be of particular help to asset-rich, cash-poor parents without liquid savings to lend to their children.
Broadhead says: “It is a really interesting way of doing it because, as a parent, particularly if you have more than one child and you haven’t got pots of cash, you can effectively assign the equity across and after about seven years it is freed up.
“You can then recycle that same allocation of equity to help your other child.”
However clever the product design, parents often end up remortgaging or trying to find money elsewhere rather than using niche schemes that can be expensive, observes Sykes.
“I could probably count on one hand the number of mortgages that Private Finance has done for people on that sort of basis,” he says.
We found that many people were worried that helping their children may leave them financially short
“It almost always ends up being better value to refinance those parents’ property on its own merits. Then you are just creating a really small-LTV mortgage and the children can get a standard mortgage rate.”
Landmore Financial Services broker Chris Dixon says: “When interest rates were lower, there was greater use of lifetime mortgages for parents and grandparents to access equity and pass it on. But the lifetime mortgage sector has suffered as a result of higher rates and this will undoubtedly have a knock-on effect.”
Keeping up with innovation
With so much product complexity, brokers have a crucial role in understanding the scope of what is available to help their clients, says Broadhead.
“Building societies can be more fleet of foot than the banks in terms of the manual underwriting; they can be more innovative. But often it takes some time for that kind of idea to develop more widely in the marketplace. One of the challenges for us is making sure that the intermediary community is across all of this innovation.
A further driver of inequality in homeownership that is likely to rise in importance in coming years is inheritance
“To find these products you might have to search a few pages down on the sourcing systems because they are not going to be at the top.”
Products can also be harder to categorise because there are so many iterations that do not fit neatly into boxes, he warns.
For determined FTBs without the benefit of family support, high-LTV mortgages are one of the few routes to homeownership. Lenders have shown a willingness to support FTBs who are struggling to afford a deposit; particularly building societies, according to Moneyfactscompare financial expert Rachel Springall.
She says: “There has been more innovation to help borrowers who are struggling to meet affordability criteria, such as with the Skipton Building Society Track Record mortgage and the more recent 99% mortgage offered by Yorkshire Building Society and Accord.
“There is still much more room for improvement in this area of the market but, with affordable housing in short supply, there needs to be significant change to turn this around.”
Someone’s ability to become a first-time buyer is increasingly dependent on their good fortune in picking the correct family to be born into rather than on their own success in life
However much brokers may welcome the launch of 99% LTV deals and other solutions, most commentators are clear that long-term housing reform is needed.
Shaw says: “I’m not sure we need more innovation, so much as help for those who don’t have the fortune to fall back on the Bank of Mum and Dad. This is the most underserved part of the market and, until people earn more in average wages or nominal house prices reduce, nothing will change.”
As the UK election battle heats up, aspiring buyers and mortgage professionals will be monitoring the promises made by each side.
This article featured in the May 2024 edition of Mortgage Strategy.
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