There’s no doubting how important the Bank of Mum and Dad (BOMAD) has been to the first-time buyer market in recent years.
Without the support of parents or grandparents, many new homeowners would simply not have been able to get on the ladder.
However, the gap between the parental haves and have-nots appears to have widened in recent years, which leaves those unable to rely upon the financial largesse of the older generations in their families somewhat up against it in terms of being able to afford a first home.
And what about those who might have planned on their parents being there to provide a deposit, for example, but who now find themselves in a rather different spot?
According to the latest Aldermore First-Time Buyer Index, this is a fate that is increasingly befalling would-be new owners. A survey of 2,000 prospective first-timers has revealed close to three in five (59%) have now been impacted by their parents no longer being able to provide financial support.
Aldermore puts this down to the high living costs that parents and grandparents have been facing, which in turn has meant they can no longer help the child or grandchild onto the ladder in the way they previously wished or wanted to.
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Indeed, when you have close to one in five (19%) expecting their parents to pay half of their overall first home deposit – approximately £24,790 – then you can see how many would-be first-time buyers are now having to put their plans on hold.
What is also interesting about the research is the ‘source of funds’ for parents who have been able to help – 57% provide cash, 16% sell a second home, 15% downsize a main home, 9% remortgage and 17% withdraw lump sums from pensions. All fairly consequential actions and likely to have a not inconsiderable impact on the financial lives of those parents and grandparents.
Watching the pennies
You have to wonder how sustainable this method of supporting offspring onto the ladder will be for an increasing number of people. While the cost of living has come down over the past year, the number of financial responsibilities continues to grow, as does their cost.
How many parents and grandparents will feel the need to prioritise their own financial lives at the expense of their children’s or grandchildren’s want to purchase a first home?
Where we can perhaps bridge this potential growing gap is with a greater provision of high-loan-to-value (LTV) mortgages – 95% and plus LTV – and a more flexible approach to affordability, particularly for those would-be first-timers who have been regularly servicing rental costs while they save for a deposit.
On that first point, it is instructive to look at the deposit figure mentioned by Aldermore – £24,970. That is almost double the 5% deposit requirement for the average UK house price; £268,144 according to the latest Nationwide House Price Index, with a 5% deposit requiring £13,407.
It will not take a mathematical genius to work out that saving the latter figure is going to be easier than saving almost £25,000, even if you were expecting your parents to come up with some of it.
Widening high-LTV mortgage choice
Now, of course, 95% LTV mortgage affordability has to be achieved, but for those who don’t have a BOMAD to fall back on, or have found this is no longer an option, then at least we can offer them 5% deposit mortgages that can allow them to fulfil the same need to get on the ladder.
In that sense, it’s vital lenders are not just pushing out first-time mortgages that rely on parental intervention, whether for the deposit, a guarantor, or a joint borrower sole proprietor (JBSP). It’s clear we continue to need a ‘no frills’ 5% deposit approach, which seems to be where building societies are carving out a niche.
A number of mutuals have first-time buyer products that champion and support the local community, supported by innovative private mortgage insurance solutions. In addition, it would help greatly if the Bank of England removed long-term fixed rate mortgages from the loan-to-income (LTI) cap.
Overall, while the number of first-time buyers has been fairly steady, there has always been a danger that the mortgage lending community only offers products to those who have parental support, when there is clearly a whole other market to be targeted and serviced where this is not on the agenda, or has been taken off.
Continuing to provide higher-LTV options allows those who can’t simply dip into their parents’ pockets to also make a first purchase and ensures homeownership remains in reach for a much bigger group.
We should continue to work hard to keep on providing greater numbers of product options for this borrower demographic.
