This is one of our most frequent questions from clients, no matter what their level of family wealth.
With the average UK home now hitting £256,000, up 8% over 2020 even in the times of COVID, the pressure is on. In the London region, the average value is £495,000. Over the same period, public sector earnings have risen by 2.8% and the private sector by 8.1%. I need to stop here and expand on the statistics, which at 8% look equal, but they are not.
A London home valued at £495,000 growing at 8% reaches £534,600 in one year, a rise of £39,600. A £100,000 salary increasing at 8% reaches £108,000, a rise of £8,000.
Even if the mortgage funding rate is 4.5 times earnings, the average earner on £31,200 can only borrow £135,900 on a mortgage.
In the UK there is a funding gap between earnings and house prices. In London, the house price to earnings ratio is 12.52 (2020 data). The lowest ratio in England is 5.01 in the North East.
The challenge for house buyers, especially first-timers, is that their earnings and savings can’t keep up with the rise in property values. They need help. There is help available, and the website ownyourownhome.gov.uk is a good place to start. Please bear in mind that applying for a mortgage is both complex and confusing at times. Much will depend on your employment record – employed/self-employed, your monthly costs, your credit record, the area of the UK where you want to buy, and the size of your deposit. Buying a new-build is also different to buying a ‘used’ property.
Aside from government initiatives, and the goodwill of mortgage lenders, the BANK OF MUM AND DAD is the most important factor. The latest findings from Savills found that parents helped 49% of all first-time buyers, with a whopping £9.8bn, making BOMAD the 9th largest lender in the UK.
The most common method for parents (or grandparents) to help is with a lump-sum gift for the deposit. The second method is a zero-interest loan, and the final step is a loan with interest. The Bank of Mum and Dad have a nice brochure which you can download at https://www.familybuildingsociety.co.uk/tips-and-guides/bank-of-mum-and-dad-research-and-guides
There are taxation considerations when parents make outright gifts. And of course, a gift is one-way, so parents need to be really sure that they can afford to support each and every child they have, on a like for like basis. That’s not as easy as it sounds.
In an ideal world, parents would sit with their children and talk it all through in a candid manner. The support of a financial planner and a trusted mortgage broker will mean that a lot of the burden will be removed.
Whatever support you give as parents, you need to be able to sleep at night without money worries. Don’t stretch your finances too far.