The dangers of borrowing from the Bank of Mum and Dad

Forget Barclays, HSBC or any of the mainstream banks you may have heard of, your next mortgage lender could be a lot closer to home.

It turns out the Bank of Mum and Dad is digging deeper than ever to help the younger generation onto the property ladder.

A study by insurer Legal & General has found parents and grandparents are contributing an average £24,100 to help family members with a mortgage deposit or property purchase.

This gets higher in London at £31,000 and is the overall total is up £6,000 on 2018.

Legal & General said the value of Bank of Mum and Dad (BoMad) lending will add up to £6.3bn this year – up more than 10% from the £5.7bn of lending last year, which L&G said makes this cohort among the top ten mortgage lenders.

They seem happy to help, with 56% of BoMaD lenders who have or would consider helping family to purchase property saying they are willing to do o because ‘it was a nice thing to do’. Another fifth said they feel it’s their personal responsibility to help out.

There is a downside though. It appears this generosity may be putting parents and grandparents’ own financial security at risk.

More than half are using or would use cash (53%) and 16% are using equity release to help fund a deposit, but 9% said they are cashing in lump sums from their pension savings, 7% are using their pension drawdown and 6% are drawing on their annuity income.

A quarter of Bank of Mum and Dad lenders said they are not confident they have enough money to last out their retirement after helping their children, and 15% have had to accept a lower standard of living.

A small number (6%) are even choosing to postpone their retirement.

This could create a worrying cycle where the kids who are being helped end up needing to financially prop up their parents or grandparents later in life.

You can reduce and try to mitigate any financial hiccups with a bit of planning. There are other options beyond just giving your loved ones’ money and it is important it doesn’t impact your ability to fund your own retirement and long-term care if needed.

Speak to your financial adviser for help if you are considering becoming a BoMaD lender.