House prices are rising faster than most people can save, and slow wage growth, plus an acute shortage of homes, makes it increasingly difficult for would-be home owners to get on the property ladder.
But while the 'Bank of Mum and Dad’ is a popular way for millennials to meet the challenge of strict mortgage criteria and inflated property prices, a new survey suggests that it may not always be the most affordable method of borrowing…Crowdfunding property service, UOWN, surveyed 2,500 parents in Britain who have loaned their grown-up kids money for a home.
Overall, the survey revealed that over a quarter of parents in Britain (25.6%) said they would charge interest on a loan to their children. What’s more surprisingly however, is that when looking at that 25.6%, the (un)official Bank of Mum & Dad interest rate in the UK is a staggering 4.3%. This is much higher than the standard bank interest rates of around 2% or lower - so parents could seriously set to profit. The average parental contribution for homebuyers this year is £18,000, according to Legal & General.
However, it is also important to remember that most parents would be taking a big risk in loaning money to their kids who don’t qualify for a loan through traditional financing.
UOWN have created an infographic map which shows how ‘Bank of Mum & Dad’ interest rates compare across the country:
The Greater London branch of ‘Bank of Mum & Dad’ charges the highest rates, proposing a whopping 4.78% interest rate to those who want to get a foot on the ladder.On the other end of the affordability scale, the most competitive interest rates in England can be found in the North East, where the average interest rate stands at 3.66%.Parents in Yorkshire and the Humber would charge an interest rate of 4.63 per cent, placing them among the most expensive lenders.
On a UK-wide level, the Scottish Bank of Mum and Dad is the most expensive lender, charging 4.77%. Parents in Northern Ireland come just behind, charging their children high interest rates of 4.69%; the Welsh Bank of Mum and Dad comes in third, with interest rates of 4.36%, and the English Bank of Mum & Dad offers the most competitive interest rates of 4.12%.
Although over a quarter of parents would charge interest on a home loan to their children, interestingly, only half of borrowers (50.4%) said they would prefer to borrow money from their family than a bank.
Shaan Ahmed, founder at UOWN, said: "Whilst the bank of Mum and Dad does have some of the highest interest rate payments out there, it may be the only piece of finance that you can get - all the other banks want to know your income, your assets, whereas for the Bank of Mum and Dad just the simple fact you need a helping hand, which they can lend, is enough. (Having the same DNA also helps!)
"Millennials today are facing pressures that haven't been seen before, so it's no surprise that parents want to help their children onto the property ladder. Ultimately the 'Bank of Mum & Dad' is a testament to parents' generosity and love across the country, but we need to bear in mind that parents face financial pressures just like everyone else, and therefore need a return on their investments. It's advisable to establish at the outset whether the money being given out is a gift or a loan, and it's also sensible to reach out for impartial advice that will help your family find the most suitable arrangement."