What are the pros & cons?
With the proverbial “Bank of Mum & Dad” lending the equivalent each year to that of the UK’s 10th largest lender, it is evident enough that parents are doing what they can to help their children to realise the dream of home ownership. What about the option to lend to other people’s children though, for a return on your investment?
This does not constitute advice and advice should be sought in all instances before acting on it.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Legal & General report that this year the “Bank of Mum and Dad” will fork out a massive £5billion to help the next generation with buying a home.
This equates to the same value of lending as one of the top 10 UK mortgage lenders.
These days, it is almost impossible for young people to save enough for a deposit, so they are forced to approach their parents and grandparents for a helping hand and the so-called “Bank of Mum and Dad” is therefore growing.
Each year, 300,000 people receive help from their immediate family to finance home purchases. 80% of the funds come from parents, 10% from grandparents and then rest from other family members, that have a surplus in cash.
“In most cases (80%), parents are the ones finding the cash, but grandparents (10%) and other family members (10%) are also helping out” Stephen Smith, Legal & General
Would you consider lending your savings to someone else’s children?
With savings rates so pitifully low, those with high cash reserves are looking for ways to earn a better return.
Some now are warming to the idea of lending their money to other first-time buyers, not just their own children, in exchange for a fair interest return.
There is only a stirring of this in the market place at present, so it will be interesting to see if things develop further in 2017.
In theory it has the scope to be a win-win. First-time buyers get the break they need to be able to obtain an affordable mortgage, whilst investors get a decent return with their money invested.
Getting such schemes in place could be a stumbling block.
“There’s been very little innovation in mortgage lending for the 40 years he has been in the industry” reflects Stephen Smith, from Legal and General.
However, the rock-bottom low interest rates on savings could be the driving force needed for change.
The key challenge is to ensure the investors money is safe, while offering a reasonable return to make it worthwhile.
Things to consider
- Supporting your own children’s dreams comes from a place of love and kindness, however financing other people’s home purchases will inevitably come from the perspective of sensible investment.
- Lending to complete strangers will require due-diligence, to ensure that the borrower meets certain criteria. At present there isn’t an obvious choice, although if this idea matures it may be that banks or peer-to-peer lending organisations get involved.
- It would be good to know that anything has the support of the Financial Services Conduct (FCA) and is therefore regulated and protected.
- A loan to family such as nieces, nephews or godchildren may be more straightforward, and it is likely that this is the next phase of lending from the Bank of Mum and Dad. Even here, legal advice could be a sensible option.
- Of course, where there is money involved, there is also the risk of fall-out, despite the best intentions. Carefully consider the personality of who you lend money to, as there is an added risk of damaging relationships.
- What if that person doesn’t pay a loan instalment? Or if they choose to spend money on a lavish holiday but fall short on your finance agreement?
- Also, funds may be tied up for a long time, depending on the arrangement made between you and the borrower.
There is lots to consider, but with careful financial planning, there could be some scope for investment opportunities.
Need help with investments & financial planning?
With current market conditions, financial planning for your whole family is essential to utilise the best of your money. Please contact Darren for a free, no obligation appraisal.
Tel: 01403 780 770