Talk it through: read this before you borrow (or lend) a deposit from the Bank of Mum and Dad
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The so-called Bank of Mum and Dad is now one of the biggest lenders to first-time buyers, a result of soaring house prices and stagnant wages.
But due to the informal nature of the relationship between borrower and lender, in the vast majority of cases huge loans are being made without any formal agreements or legal arrangements in place.
The awkwardness many of us feel about talking about money with our relations means that only one in five young buyers agrees a monthly repayment plan with their parents.
A quarter of first-time buyers simply make a verbal agreement to repay the loan.
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Research by Post Office Money found that 83 per cent of parents have no formal agreement in place, whether over repayments, a deed of gift or letter of intent, meaning that unscrupulous children could simply refuse to repay the money.
And with an average loan of £24,300, for those parents who are not gifting a lump sum but will need the money back, this is a big risk to take.
The average first-time buyer property in the UK costs £211,000, according to the Office for National Statistics, with the average buyer taking out a mortgage of £160,000 to pay for it.
This means that the parental loan amounts to around half the cost of a deposit, meaning that first-time buyers who do not discuss money with their parents are leaving themselves in a precarious position too.
Even among those who do agree a repayment plan — giving back an average of £500 a month over four years — 23 per cent of them renegotiate the deal further down the line for one reason or another.
To help bridge this gap, Post Office Money has joined forces with The Money Charity to produce a guide that help parents and children talk openly and honestly about the deal they’re making with each other.
Here are their top 10 tips:
For children
- Make amends. If you have failed to repay money in past, apologise and be willing to sort this out before borrowing even more.
- Be specific. Show your parents your research about what you want to buy, what you can afford and how much you would like from them
- Keep an open mind. Ask for what you want, but remember that your parents have every right to refuse so have a Plan B as a back-up.
- Be patient. Give your parents time to think about what they can realistically can afford to lend.
- Be thankful. Say “thank you” and then negotiate a formal arrangement about repayment, taking into account changes of circumstances on both sides.
For parents
- Be sensitive. Consider your child’s views and wishes, which may not match yours.
- Be prepared. Think about your child’s concerns about borrowing a large sum and discuss the matter with an open mind.
- Be precise. Listen to your child’s request without interrupting, but don’t rush to make your own decision.
- Be clear. If you can’t afford to make a gift or a loan, explain why as honestly as possible. If you can, explain how much you can afford and why.
- Be frank. Don’t let embarrassment on either side get in the way of talking about the agreement and make a record of the conversation, which you should both agree on.
“Talking about money is one of the last great taboos, if you feel embarrassed, protective or defensive, you are definitely not alone," says psychologist and psychotherapist Corinne Sweet.
“Money brings up strong feelings connected to survival, worth, status, power and success, and we all carry ‘emotional money baggage’ which affects how we feel, and talk, about money.
“People borrowing from their parents should be patient and willing to have an open discussion about how the arrangement will work long-term, keeping in mind the big financial commitment their parents are making.”