Could the Bank of Mum and Dad lend to other people's children?

Couple moving in together Image copyright Digital Vision

Has the Bank of Mum and Dad run dry? Then maybe it's time to ask someone else's parents to help you buy your first home.

A survey by Legal and General suggests more than a quarter of UK parents (27%) would consider funding other people's children onto the property ladder in exchange for a return on their investment.

What is the Bank of Mum and Dad?

This year, the so-called Bank of Mum and Dad will lend £5bn to the next generation of UK homeowners, making it the equivalent of a top 10 UK mortgage lender, says Legal and General.

Now, it looks as though some parents could consider reaching out to needy nieces and nephews, godchildren, their friends' children and even strangers.

Every year, 300,000 people are getting financial help to get on the property ladder.

In most cases (80%), parents are the ones finding the cash, but grandparents (10%) and other family members (10%) are also helping out, says Stephen Smith, from the financial services provider.

Could this become a new thing?

There's no hard evidence of it happening yet, but mortgage experts agree the idea of parents lending to children, other than their own, is an interesting one - especially at a time when interest rates for savers are so low.

In principle, it has the potential to be a win-win, giving people with money a place to invest it with a decent return, and giving first-time buyers a leg-up. But there are significant hurdles.

The idea may seem good over a couple of drinks, but long-term it could prove to be a bit of a problem, says Yvonne Goodwin, independent financial advisor.

And Sue Anderson, of the Council of Mortgage Lenders, is cautious, noting that an appetite to invest savings in this way is not the same as actually doing it.

How could the financial industry support this?

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Schemes for this don't exist in the mortgage market at the moment.

The closest thing is peer-to-peer lenders which allow people to invest small sums of money in the buy-to-let market.

It will take bright people coming up with some innovative ideas to get some schemes in place, says Stephen Smith, from Legal and General, who reflects there's been very little innovation in mortgage lending for the 40 years he has been in the industry.

However, today's low interest rates may be the stimulus needed, he adds.

Ray Boulger, a mortgage expert with John Charcol, suggests there are already a small number of schemes that could be adapted to accommodate this new idea.

But the challenge is to find a way to make their investor's money sufficiently safe while offering a good enough return to tempt them to do it, he says.

What should Mums and Dads bear in mind?

"I don't think people will do this out of the kindness of their hearts - it's tough enough supporting your own children," says Stephen Smith. "Parents will need to compare the sort of return with what they could make from cash ISAs or the like."

If you are lending to strangers, he goes on, you would need someone to take an informed judgement on their suitability as borrowers, which is why an institution needs to be involved, whether a bank or building society or peer-to-peer lender.

And you need to be satisfied there is an established infrastructure in place, preferably covered by Financial Services Regulation.

If you're lending to nieces, nephews or godchildren, simply gifting the money or making a soft loan should be straightforward, but it may still be worth taking legal advice, says Ray Boulger.

Sue Anderson warns that with loans it can be "very easy to inadvertently act in a way that's not compliant with the law".

What are the downsides?

The obvious one when it comes to lending to people you know is the risk of damaging the friendship or relationship.

If the borrower says he can't repay or needs to defer and then you see Facebook pictures of him on an exotic holiday, the friendship as well as your money would be at risk, says Yvonne Goodwin.

Time is also an issue - the money is not liquid and might be tied up for a long time, Ray Boulger warns.

More widely, the Bank of Mum and Dad in itself is not a good thing, says Stephen Smith, as it means people are struggling to save up for a deposit, so perhaps it's not something society should encourage.

If you're a first-time buyer toying with the idea of asking your wealthy great-aunt for help, what do you need to remember?

Image copyright Artem Furman

Stephen Smith offers his top tips:

  • Be nice
  • Be honest
  • Meet your mortgage payments
  • Don't embarrass your relatives

If that fails, what are your options?

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Image caption If you're set on a pad in Mayfair, you might be best off renting

Aside from winning the National Lottery, you could try saving the required 5% deposit.

You won't get anywhere near the sort of mortgage rate you could have got with a chunkier deposit, if the begging had worked. But once you've got the deposit together, most people say the hardest bit is over and finding the monthly payments is much easier.

Stephen Smith has some ideas for other options:

  • From age 16, you can save £200 a month with the Help to Buy ISA, up to £3,000 in total. When you buy a house, the government will add a quarter to whatever is in the account
  • Decide whether it's more important to own your own home or to rent in the place you actually want to live. Often, buying a house forces you to compromise on location
  • Pay off your debts - overdrafts and credit cards are the most expensive form of borrowing

And if that doesn't do it, a last ray of hope from Ray Boulger: After Britain leaves the European Union, relaxed regulations could mean banks drop deposits required from first-time buyers to below 5%.

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