Many people have relied on the financial support of older loved ones to help with some of life’s key events. Millions of British parents have helped their children with raising a mortgage deposit, for instance, and with the cost of weddings and university.
Yet many young people cannot rely on this support (due to less wealthy family members). Moreover, as UK living costs rise in 2023, many middle-class parents are finding it harder to provide the same financial support as before – fearing they may run out of money in retirement.
The economic landscape in Britain has changed significantly over the decades and is likely to evolve further in the years ahead. Can younger generations rely on the “bank of mum and dad” as many have done before? Should they do so?
Below, our Carlisle financial planners offer our penny’s worth for younger readers who want to progress towards their financial goals. We hope these insights are helpful to you or to someone you know. Please contact us for more information or to speak with a financial adviser:
t: 01228 210 137
e: [email protected]
What is the bank of mum and dad?
The bank of mum and dad, in short, is a colloquial phrase to describe a significant level of financial support to a child from his/her parent(s). It is typically applied to a first-time buyer who receives a large lump sum to help pay for their first mortgage deposit.
There are many advantages to getting financial help from your parents compared to a bank. Firstly, you are likely to get better borrowing terms. Some young people are simply gifted the money outright with no expectation of repayment.
Others are lent the money but with a very favourable “interest rate” and/or repayment period. If you default, moreover, your family is unlikely to come and seize your home from you!
Is the bank running dry?
In 2022, the bank of mum and dad paid out nearly £9bn to 170,000 first-time buyers – equivalent to what the UK government spends on the London Underground and the National Roads. Around one in three over-65s still rely on it (e.g. via inheritances) to help pay for retirement and mortgages. For those aged 25-34, around 44% rely on the bank of mum and dad.
Media reports have been claiming for years that the bank of mum and dad is running dry. Yet the issue is coming into sharper focus in 2023 for at least two reasons. Firstly, higher inflation is putting greater pressure on the ability of younger people to save – driving them to rely more on family financial support.
Secondly, average property prices continue to rise in the UK. At the same time, real average wages (earnings accounting for inflation) have barely improved since 2001. Together, this has made the dream of getting onto the housing ladder harder and harder for a lot of young Britons.
Higher property prices also put pressure on the ability of older generations to provide financial support – e.g. to help a child buy his/her first home. As a result, more young people are also turning to siblings, cousins and grandparents – the “bank of family” – to raise a deposit.
What should young people do?
This is not a very uplifting picture, is it? Yet young people should not despair. The bank of mum and dad is not imminently about to run out across the UK. Many people will still be fortunate enough to have financial support from their parents for some of life’s key events.
Of course, not everyone is equally fortunate and you cannot necessarily rely on financial support from your parents in the way you might expect. For instance, on average, 18-24 year-olds expect to receive over £100,000 from their parents when they die.
In reality, however, the national average is just £11,000 and the inheritance might not be received until much later in life. In short, if you are expecting your inheritance to pay for your first house, you may be waiting a long time!
If you do not have a viable bank of mum and dad available to you, then you will naturally need to take charge of your financial plan to progress towards your goals. Try to establish a target – e.g. the amount you need to buy your first property – and devise a savings plan.
For example, if you want to save £40,000 for your first deposit within 4 years, then that requires £10,000 per year. One way to boost your savings is to consider tax-efficient “vehicles” like the Lifetime ISA. Here, the government will “top up” your contributions by 25%, up to £1,000 per year. If you contribute the full £4,000 each year for 4 years, this is an extra £4,000.
If your target is too ambitious, you might need to scale back your property expectations and/or increase your savings timeframe (e.g. to 6 years or more). Other options include buying a property with a partner, a trusted friend or a family member. However, be careful to consider the risks of this option together, beforehand. Document various scenarios with a solicitor so everyone is protected (e.g. in case you break up with your partner or your sibling moves out).
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.