The bank of mum and dad is heavily relied upon by many younger people, whether it’s a helping hand through the university years, on to the housing ladder or even to pay everyday bills. But how vital is it – and what pitfalls should parents consider before opening a branch?
What role does this bank play in family finances?
Parents of university students typically give their children about £287 per month to support them through their studies, according to insurer Aviva. One in ten parents in the UK with children at university say they give their child about £750 a month on average.
Legal & General and economics consultancy Cebr found the bank of mum and dad is a major lender when it comes to giving the younger generation a helping hand buying a home. Parents will lend £6.5 billion for such purchases in 2017 and be involved in more than a quarter of UK property transactions, the research indicates.
And parents with grown-up children still living at home spend an extra £456 on them annually compared with empty-nesters, according to the Centre for the Modern Family think-tank set up by pensions provider Scottish Widows.
That research, carried out last year, found that as well as shouldering the cost of their child’s basic needs - bed and board - parents are also forking out for services used by their adult children, such as Netflix, as well as for their mobile phone bills, holidays, haircuts, clothing and even beauty treatments.
But could parents face hidden costs?
Helen Morrissey, personal finance specialist at mutual insurer Royal London, says: “Making the decision to hand over a large sum of money, whether as a loan or a gift, is a major financial commitment and parents need to consider all the options before deciding to do this.
“Parents must ensure they are aware of the potential tax implications, and consider that giving away or lending a large sum could affect them further down the line if their circumstances change.
“In addition, arguments over whether money needs to be repaid, or over what time period, have the potential to cause considerable harm to the parent/child relationship.”
So what are the pitfalls to watch out for?
Here are five hidden costs set out by Royal London:
1. Is the money a loan or a gift? Disputes can occur if parents and children have differing ideas.
2. Tax. Parents should understand the possible tax implications of being named on the deeds of a property bought with their child.
3. Future financial hardship. Parents can hand over what they believe is an affordable amount only to find their own circumstances change and they are short of money. Similarly, children may initially be able to make repayments but struggle to do so once they have children or face unemployment or work absence due to sickness.
4. Parents must consider their position in the event of a property needing to be sold during a housing market downturn. If the property is in negative equity, parents may not see their money returned when they expected.
5. Relationship changes. Parents will want to help their own children but may want to think about what would happen if their child forms a new relationship or an existing relationship breaks down.