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Calling time on the Bank of Mum and Dad?
In recent years, the Bank of Mum and Dad has emerged as a key player in allowing first-time buyers to access the property ladder. Money gifted or loaned to children or grandchildren for this purpose reportedly amounted to more than £5bn in 2019.
However, the economic downturn that’s anticipated to follow the COVID-19 pandemic is likely to impact on the housing market and could mark a watershed moment. For the first time, the Bank of Mum and Dad may be in retreat – so what are the implications for those funding it and those who benefit from it?
In a potential sign of things to come, Nationwide has introduced a temporary measure curbing the extent to which first-time buyers can use the Bank of Mum and Dad to fund a deposit on a property.
Under the new rule, prospective homeowners must prove that they have saved 75% of their deposit themselves to obtain a mortgage that covers 90% of the cost of their home. The rule doesn’t apply to customers seeking deals at 85% loan-to-value or lower.
Some other lenders have withdrawn their highest loan-to-value deals in the wake of the pandemic and subsequent concerns over an increase in negative equity.
Amid the economic uncertainty, it appears that banks are introducing such restrictions in order to limit lending to borrowers who they perceive as being less likely to experience difficulties in making repayments. However, this rationale is proving to be somewhat controversial and many market experts maintain that first-time buyers can be relied upon to meet their mortgage obligations regardless of how their deposit is sourced.
The extent to which access to the property ladder will be reduced by these moves remains to be seen. As yet, other banks haven’t followed Nationwide’s lead on restricting the role of the Bank of Mum and Dad in funding house-buying. The number of first-time buyers as a proportion of the market is beginning to decline but other factors, such as a sharp increase in working from home, may be responsible for the drop.
Whilst the focus of this shift in policy made by lenders has been on how the recipients of Bank of Mum and Dad use the funds, it also has repercussions for the parents and grandparents who are making financial gifts or loans. If one of the main reasons for passing on wealth to children and grandchildren is curtailed, what other options remain available as regards estate planning?
Clearly, the consequences of the pandemic are far-reaching, and both the housing market and wealth distribution mechanisms are not immune to its impact. What remains unclear at this stage is whether the changes it brings will be temporary or permanent.