Uncategorized // March 22, 2017
The “Bank of Mum and Dad” aka #BOMAD, is currently the fourth largest mortgage lender in the UK, with many young people leaning on parents as their only means of getting onto the property ladder, but what does this mean for the older generations finances? Will the money they are lending out ever be repaid, or will this trend in lending significant sums of money to offspring simply become an additional expense to the £230,000 that it costs on average to raise a child?
With a 29% increase in the amount of money that is being loaned by parents to children from last year, many parents are dishing out loans of £3,000 or more, and the amount of parents that have lent out more £10,000 has increased by almost a quarter. On the one hand, this trend could be viewed as neat inheritance tax planning, with parents’ money going straight to their children during the time when they need it the most, but on the other hand it could result in parents being financially deficient in old age, struggling to find the money to see them through retirement comfortably.
Though many children admitted to feeling guilty about borrowing money from their parents, a recent survey (covered by the BBC) showed that only 34% expected to have to pay the money back. Whilst many people come to an agreement about repaying the money, in the long run they fall short, so how can this be avoided to ensure that parents won’t be out of pocket? A loan schedule can be written up by a professional financial advisor, and will detail any specific terms and interest rates family members may wish to include, as well as Inheritance Tax implications. This will be a signed contract that both parties can agree on, making the agreement legally binding. Though it may seem a little extreme to write up contracts between parents and children, it is the most efficient way of ensuring that everyone sticks to their word and can help avoid awkward situations in the future.
It is a natural instinct for parents to put their children first, particularly when it comes to finances, but if the Bank of Mum and Dad wants to avoid a financial crisis, they would be wise to seek advice about their lending.