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Keith Richards: Advising the Bank of Mum and Dad

The Bank of Mum and Dad – or Bomad – has become one of the most significant lenders in the market and needs to be considered an important branch for the financial planning profession.

In 2016, Bomad financed a quarter of all mortgage transactions, which put it on a par with Yorkshire Building Society. It has since grown to become the sixth-largest lender in the UK, totalling more than £5.7bn in value last year.

With the ongoing consolidation of the lender market – which by 2018 stood at only a third of the size it was five years previously – young people may increasingly be inclined to look to their family for assistance.

Keith Richards: Consumer protection is confused by compensation

Recent figures revealed by the FCA show one in five people under 35 expect to receive financial help from their family. It is increasingly difficult for younger generations to take the first step on to the property ladder, recognised in that more than a third of all significant cash gifts from Bomad are given for a mortgage deposit. These contributions average more than £76,000 in London.

That said, parents making such contributions are not necessarily “high earners”. It is worth noting while the wealth of the baby-boomer generation has doubled in the past decade, many are now retired.

Considerable numbers of baby-boomers are withdrawing the large cash sums from their pension pots or, in some cases, downsizing or releasing equity on their own home, without fully understanding the long-term consequences.

The FCA’s Financial Lives Survey, published last year, revealed that, of all parents who gifted their children large sums of money, a massive 92 per cent did not seek any kind of professional financial advice. This could be potentially disastrous for their personal finances, as retirees run the real risk of running out of money. So more needs to be done by government and regulators to raise awareness among the public.

Keith Richards: Contingent charging must be preserved 

This issue of practicality is further exacerbated by the reluctance of many to formalise conditions when family is involved. Indeed, only 14 per cent of those polled by the FCA sought legal advice when handing money over to family members.

The sum required for a deposit is unanimously higher than the £3,000 gifting threshold currently maintained by HM Revenue & Customs and remains part of the originator’s estate for seven years.

It would be wise to have all transactions of significant value formalised. This is certainly true for a loan, so that the repayment terms are mutually agreed, but even a gift with no expectation of repayment at all. Such protections can help safeguard all parties involved.

This represents a growing trend and an increasing need for professional financial planning.

Keith Richards is chief executive of the Personal Finance Society

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. And talking of protection, if the son/daughter or their partner dies or becomes too ill to work and pay the mortgage, the parents won’t want to find they’re picking up the bill for that too, especially f they’ve already raided their pension pot.

  2. “It would be wise to have all transactions of significant value formalised. This is certainly true for a loan, so that the repayment terms are mutually agreed, but even a gift with no expectation of repayment at all.”

    I’d be surprised if you could get away with not doing that; any conveyancer doing a proper job will prove source of funds for the deposit and will want some documentary evidence for their records. Of course, other people’s lawyers may not be as good as mine.

  3. Misunderstandings and lack of documentation between the providers of the help and those receiving it were two of the biggest issues that the recent London School of Economics report ‘BOMAD – how it really works’ highlighted.

    On the back of this report we have created a ‘How to run the bank of mum and dad’ guide that explains the pitfalls to avoid. It is available on our website: familybuildingsociety.co.uk/runningbomad

    Alistair Nimmo, Director of Marketing, Family Building Society

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