Do First-Time Buyers Rely On Parental Support?
As many of us are fully aware of, getting onto the property ladder in the UK can seem an almost impossible feat. The Chancellor Phillip Hammond announced in the budget released in November that first-time buyers will now be exempt from paying stamp duty with immediate effect (or only paying for a property worth £500, 000 or more, previously, stamp duty was required for all residential properties above £125,000). However, whilst a step in the right direction, for many prospective home-buyers, the situation remains difficult.
Indeed, research conducted by the University of Cambridge and Anglia Ruskin University has shown how numbers have dropped considerably when it comes to getting on the property ladder. Home ownership has fallen by more than half in the last 25 years. For those aged between 25- to 29, this number has fallen from 63% in 1990, to 31% in recent years.
As a result, many are turning to their parents to help them afford their own home.
How many first-time buyers receive help from their parents?
In a report by Legal & General, they predicted that by the end of 2017, nearly £6.5bn will be loaned by the bank of mum and dad to help their offspring get their foot onto the property ladder, an increase of over 30%. It is a historic high.
In even more stark statistics, over a quarter of homes bought this year in the UK were financed by parents. In fact, the growing amount of mums and dads providing financial support to their children means that they are now the UK’s ninth biggest mortgage lender. It was also noted that those who received help from parents were mostly under 30, making up over 79%, as well as the fact that those who receive parental support for financing a mortgage can on average buy a property 2.6 years earlier than those who do not receive money from their parents. In London, this figure almost doubles to 4.6 years.
Overall, a third of first-time buyers in the UK (34%) rely on parental support to put down a deposit on their very first home. Less than a decade ago, only 1 in 5 relied on such financial support.
With young people in the UK being increasingly referred to as ‘Generation Rent’ the problem is in many ways a vicious circle. House prices are staggeringly high, and not in line with wage growth, so people struggle to pay for a mortgage. For many, this will mean that they also have to rent for longer, which then means rent prices increase as demand goes up and they could be left struggling to afford for monthly costs too. In fact, in 2017, rent costs more than mortgage repayments typically do in the UK. (Source: money blog UK)
Even worse, in the ten years up to 2015, the number of young people who remained living at home with their parents had increased by an overwhelming 700,000, according to the insurance company Aviva, as a result of incredibly high deposit and rental prices. They also estimated that by 2025, this number could rise to over 3.8 million based on current data, which could make multigenerational much more common in the UK in the future. In addition, the average house price in the UK had risen by more than 50% to around £280,000 between 2005 and 2015, which all goes some way to explain the dismal statistics.
Helping with rental costs too?
As a result of the aforementioned depressing mortgage and rental statistics, many parents are not just financing mortgages for their children, but rental costs too. The Legal & General Report highlighted that £2.3 billion rental payments in 2016 were made by parents, whilst one in 10 renters in the UK receive financial support from their parents to help pay their rent each month.
Expectations of being paid back?
For the majority of recpients (56%) of parental support to get their first home, there will not be an expectation of paying the money back. On average, the amount given to home buyers by the bank of mum and dad was around £21,600. For the rest, 21% of recipients were expected to pay it back interest-free, and for 2% the expectation was to back the money with interest added.
A barrier to social mobility?
Chair of the Social Mobility Commission, the Rt Hon Alan Milburn, has expressed his concern over the increasing reliance of first-time buyers receiving help from the bank of mum and dad -which still remains a luxury for the few. Milburn believes that the housing market is widening inequality in the UK.
Those fortunate enough to have parents both willing to help them get on the property ladder and have the financial means to do so is now increasingly becoming the reason why owning a home has become a reality. For those from low-income families, home ownership can remain just a chimaera. For example, the report estimated that only 10% of households without formal educational qualifications feel able to help their children with purchasing a home.
What can be done to address the housing market inequality?
In order to address the widening inequality when it comes to the housing market, the Social Mobility Commission in its most recent State of the Nation 2016 report has recommended that:
- The government needs a greater focus on those with average incomes through its starter home initiative. In the event of these homes being sold, the same discount should be applicable to those from a similar, low-income background.
- Building 3 million homes in the next decade with at least one-third being commissioned by the public sector.
- Redevelop the worst estates in the UK to improve work opportunities for low-income tenants.
- Increase sale of public sector land for the development of new homes.
The reality is that parents will rarely need to assist with their children when it comes to bridging finance. This is because the services we offer are typically used by existing homeowners looking to move home or buy to let property investors looking to break property chains. Nonetheless, the statistics above provide an interesting argument and for more information, follow our blog and social media.