The bank of Mum and Dad

How to make the Bank of Mum and Dad work for you

If your adult children still rely on you for financial help, you may have heard of the ‘Bank of Mum and Dad’. While it may be reassuring to know you can support your children through a crisis, or supply a handy home deposit, there are advantages and disadvantages to giving your children a cash injection at a critical time. So, can you be certain that what’s good for them is good for you too?

What is the Bank of Mum and Dad?

The ‘Bank of Mum and Dad’ is a term used to describe the phenomenon where parents give financial support to their adult children. You might think that once your children are through school or university their dependence on you for money will be over, but for many families, the rising cost of living, a lack of savings and the increasing cost of housing mean that adult children are often still dependent on their parents, or the ‘Bank of Mum and Dad’, to help with significant purchases such as a house, car or other items.

In fact, research by Opinium for Saga Equity Release found that 1 in 4 parents over the age of 50 expect to be providing financial support to their adult children over the coming months (and expect to still do so in a year’s time).

The advantages and disadvantages of the Bank of Mum and Dad

Helping out your children, whether out of love, duty or both, is of course a completely natural thing to do. But it isn’t always plain sailing, so it’s important to weigh up the pros and cons before getting the cheque book out.

Some of the advantages of opening the piggybank at the Bank of Mum and Dad include:

• Tax-free gifting: Under Inheritance Tax rules, parents can give up to £3,000 per year tax-free. Any further amount on top of that will remain exempt as long as the parents live for seven years after the gift.
• Lower mortgage repayments: If the Bank of Mum and Dad contributes to the deposit on a house, this may mean their child can borrow less, so may benefit from a lower interest rate and have lower monthly repayments.
• Better mortgage offers: A bigger deposit may also mean your child has access to better deals to choose from.
• More property: With a contribution from the Bank of Mum and Dad, it might be possible to buy a bigger home, or one that’s in a more suitable location. This may mean your child is less likely to move again quickly – saving money in moving costs.

On the other hand, all that generosity comes at a price, and there are a few disadvantages to consider:

• Using savings: Can you afford to give money to your children without risking your own future security? You don’t want to be struggling with living expenses further down the line.
• Fewer mortgage options: If you’re lending money rather than gifting, some mortgage lenders will count borrowed deposit repayments as part of an affordability assessment and will lend less as a result.
• Family dynamics: Talking about money in a family can be difficult, and if parents are lending to one child and not another it might cause all sorts of issues and arguments.
• Complications: If your child buys a house with a partner and that relationship breaks down, there is a risk your child will lose some or all of the money. To protect the money you contribute, you should ask the solicitor working on the purchase to draw up a declaration of trust that specifies who the money was given to.

Ways to give money to adult children

If you want to help your adult child with a Bank of Mum and Dad loan or gift, it’s best to be clear about your intentions upfront. Make sure everyone involved understands whether you are making a gift or expecting the money to be repaid, either with or without interest.

Gifting money

If you can afford it, giving a lump sum to your children makes it less complicated for them to get a mortgage. The money is counted as part of their own deposit, and mortgage providers don’t need to worry that a third party has an interest in a property, making it a simpler agreement. You might just have to provide written confirmation that it is indeed a gift.

What’s more, everyone can give away up to £3,000 each year tax-free, and this allowance can be carried over to the next year. This means that two parents could gift up to £12,000, which would go a long way to help with a house deposit.

You can give more than that, but if the person giving the money dies in the next seven years, the gift will be counted as part of their estate and taxed. The amount of Inheritance Tax depends on the size of the estate and the time that’s passed since the gift was given (this is known as taper relief).

Lending money

If you’d prefer the money to be a loan rather than a gift, you can draw up a Bank of Mum and Dad loan agreement that lays out the terms of the loan, the amount of interest you expect to get, and when you want the loan repaid.

You should think about what happens if things change, such as if a parent dies, or if the child has bought the property in a joint agreement that fails due to divorce or separation.

The loan needs to be declared as part of a mortgage application, and this can affect eligibility, as some providers won’t accept a borrowed deposit.

Bank of Mum and Dad mortgages

If you don’t have the funds to gift or loan a lump sum, you could look at different types of mortgage, such as the following:

• Guarantor mortgage: You agree to cover the mortgage payments if your child can’t.
• Joint mortgage: You combine your incomes to get a bigger mortgage and are equally liable for repayments. If you already own a property there could be tax complications with additional Stamp Duty for second homes and Capital Gains Tax when selling.
• Equity as security: You use a proportion of your home equity as additional security against your child’s mortgage loan.
• Savings as security: Known as family offset mortgages, you can offset parental savings against a child’s mortgage, reducing the interest paid. This does tie up your savings until the end of the loan period.

All being well, these options shouldn’t cost you anything – but you do need to be prepared if your child isn’t able to make the mortgage payments.

How to fund loans to adult children

According to Opinium’s research, the ongoing effects of the Covid pandemic and the growing cost of living crisis have driven a shift in the way many over-50s are thinking about inheritance.

Over a third (34%) of the survey respondents said they are now more open to different types of inheritance, with the same percentage wanting to see their children benefit from their estate while they’re still here to see it.

You have some different options to consider if you’re looking to fund a loan for adult children:

• Personal loan: Even if you’re retired you can take out a loan, either unsecured or using your home as security – but you’ll need to have enough income to make the repayments.
• Remortgaging: A new mortgage agreement could free up some money from the value of your home to use for a Bank of Mum and Dad loan.
• Retirement interest-only mortgage: With this type of mortgage you just pay the interest in monthly payments, which you’ll need to prove you can afford. The rest of the loan is paid off when you die.
• Home reversion plan: You sell all or part of your property to a provider and continue to live in your home until you die or go into permanent long-term care, releasing equity that can be used to support your children.
• Lifetime mortgage: With this type of equity release, the mortgage is usually repaid from the sale of your property after your death or if you move permanently into long-term care. Making monthly repayments is optional. A lifetime mortgage is a loan secured against your home.

Remember that releasing equity from your home will reduce the value of your estate when you die.

The Opinium research suggested that 5% of parents aged over 50 are considering equity release, rising to 13% among those aged over 80. The most common reason cited is to release funds to support their family.

If you'd like to find out more about equity release as a source of funds for The Bank of Mum and Dad, you can use Saga Equity Release. It's a no-obligation, no-pressure advice service dedicated to finding out if equity release is right for you. If after taking advice you decide to take out a Saga Lifetime Mortgage you'll need to pay an advice fee of £799.

To be eligible for equity release you need to be aged 55 or over with a UK home worth at least £70,000.

Why do parents open the Bank of Mum and Dad?

Whether you’re happy to help your children or think it’s unfair to do so, parents that have seen their children struggle over the past couple of years – especially with the lingering effects of the Covid-19 pandemic – have been moved to step in and help where they can.

But what are children relying on their parents to buy for them?

• House: Accommodation sits at the top of the list, with nearly half of first-time buyer house purchases in 2021 funded by the Bank of Mum and Dad, according to research from property group Savills. Parents either give or lend the money for a deposit to get children onto (or jump up) the property ladder.
• Car: A new set of wheels is another big cost that parents often contribute to, potentially as a way of making an adult child more independent, or to help them commute to work or visit more often.
• Celebrations: When there’s something to celebrate, the Bank of Mum and Dad might want to help make a family event as special as possible. Weddings, honeymoons or christenings are all occasions where parents might put their cash to use to increase the budget.
• Crisis: Parents also step in when more serious life events occur. For example, events like divorce, debt or redundancy might call for a cash boost to get a family back on its feet and on the road to financial recovery.

Top five tips for being the Bank of Mum and Dad

1. Talk about it - As with all parenting, presenting a united front is key to successful family dynamics. Make sure you’re both happy with the amount of money – and the way you’re offering money – to support your children.

2. Is it fair for all? - If you have more than one child, be open with the siblings too, and work out how you plan to support each child that needs help. That way you get to avoid any awkward secrets or feeling of unfairness that can spoil family relationships.

3. Can you afford it? - You need to plan out your own needs – pensions, living expenses, holidays or new cars, and ultimately social care costs – in order to make sure you’ll be comfortable in retirement. Keep a buffer for the unexpected before giving or loaning money to your children.

4. What happens with tax? - There are different implications with gifts, loans and mortgages that could affect you and your children’s tax position, so you should work this all out before you start.

5. Put it all in writing - Make sure everyone involved knows and agrees to what’s happening, whether the money is a gift or loan, and what happens if circumstances change.

Follow these tips to establish a successful Bank of Mum and Dad relationship, and with any luck, you’ll be able to support your adult children financially and continue to enjoy their (conflict-free) company.

The survey data is based on research conducted by Opinium in April 2022 of 2,000 respondents aged over 50 with children over the age of 18.