Lending by parents and grandparents to their children and grandchildren has grown so vast – insurer Legal & General reckons it will amount to £6.5bn this year – that the Bank of Mum and Dad can now be described as the UK’s ninth-biggest lender. It is also “Britain’s most lenient lender”, notes the Daily Mail. The data suggests the majority of parents who have made such loans have ended up writing off some or all of the debt.
Of the 1,057 people surveyed by insurer Prudential, every single one said they had already loaned money to their children or grandchildren, or planned to do so. With house prices rising faster than wages and exorbitant rents leaving many young people with hardly any money to save, it is hardly surprising that parents are stepping in to give their children a financial leg-up.
However, this well-meaning behaviour could just be storing up trouble for the future. Nearly a fifth of parents who responded said they had taken money out of their pension, or reduced their level of pension saving, to give money to their children. Moreover, another fifth admitted they had been forced to make cuts as a result of lending money to family. And as many as 60% of parents ended up writing off at least some of the loan, leaving them permanently worse off. The write-offs resulted from children either struggling with repayments, or never having any intention of repaying.
It’s understandable that parents want to help their children. But it’s not much use if you are going to end up needing their support in the future as a result of your largesse today – particularly given the huge potential costs of care – not to mention the impact on their motivation and self-reliance. If you are still determined to help out – and have the money to do so – see the column on the right for tips on the best ways to go about it.
Lending tips for the Bank of Mum and Dad
When deciding how much to help a family member, be realistic about how it might affect your finances in the future. As the Prudential survey shows, the likelihood is that what you lend will not be repaid, so make sure you are prepared to do without that cash. And if you are considering giving your children a large amount of money, it may be wise to get some independent financial advice beforehand to make sure your own financial security won’t be undermined by the gift.
If you are genuinely lending rather than gifting cash to your child or grandchild, you have to set down terms. Do you want them to repay you monthly, or in a lump sum at a later date – for example, when they sell their home? Agree the terms, including if you are expecting to be paid interest on the money, and make sure you write them down so there are no future disputes.
Be aware that lending money to your children may have negative consequences for them, as well as for you. For example, if you loan them money for a house deposit, be aware that the mortgage lender may include repayments on that loan in their affordability calculations, reducing how much it is prepared to lend.
Finally, remember the Bank of Mum and Dad isn’t based in a tax haven, so consider the tax implications of any money you give or lend to your children. If you give them more than £3,000 a year, then this money could be liable for inheritance tax if you die within seven years of the gift. Alternatively, if you loan them money, interest payments could be liable for income tax, and if you help them to buy a property, you might end up with an unexpected bill for capital-gains tax.
In the news this week…
• Thousands of students are currently embarking on their first flat or house-share – but many are badly informed about their rights and obligations, particularly when it comes to deposits, says The Sunday Times. By law, the deposits of any assured shorthold tenancy must be placed in one of three government-backed protection schemes: the Deposit Protection Service, MyDeposits or The Tenancy Deposit Scheme. These are your “first port of call” should anything happen. But that may not be enough. All too often, students moving into large houses simply “buy out” someone who is leaving, and this payment is “deemed to be their deposit” and not recorded on the tenancy agreement. This leaves you on “shaky legal ground”. It is vital not only to ensure that you are on the agreement, but to have written evidence of any payments. And ideally, try to get an individual tenancy agreement with your landlord – with shared tenancies, flatmates are jointly responsible for the rent.
• The time is ripe for borrowers to slash their mortgage costs, says Teresa Hunter in The Sunday Times. After a flat lending year, banks and building societies are aggressively chasing business to meet targets ahead of the New Year. The homeowners with the most to gain are those on standard variable rates, to which borrowers default at the end of their deals. Someone with a £200,000 loan on Newcastle Building Society’s SVR of 5.99% could cut their costs by 40% by switching to Sainsbury’s two-year fix at 1.09% (although you need a 40% deposit for this deal). For buyers with a smaller (15%) deposit, the Post Office has a two-year fix at 1.73% with no arrangement fee.
• Be sure to check the serial number on any new £10 banknotes you get this week, says Laura Suter in The Daily Telegraph. They can be worth thousands. The low numbers will be the most lucrative, but “quirky” numbers such as 007 or significant numbers such as 16 121775 and 18 071817 (Jane Austen’s date of birth and death) will also become collectable. To give an idea of prices, the AA01 000010 note being auctioned by Spink on 6 October is expected to fetch £2,000-£3,000.