19 May 2016
The acquisition of the Bank of Mum and Dad
by Frank O’Nomics
The Bank of Mum and Dad is big – and it is getting bigger. We should not be surprised. A bank that charges very little (or no) interest and will lend for very long (or infinite) periods, the BOMAD is a very popular option for children. It now seems that its activities extend way beyond offering sums to tide offspring over tricky financial periods, with recent research by Legal and General and the Centre for Economics and Business Research suggesting that in 2016 some £5 billion will be “lent” to home buyers by their family and friends. This level of lending puts the BOMAD into the top 10 mortgage providers in the UK, so it is no surprise that the major banks have been looking for ways of tapping into this to generate more business for themselves. If successful, it would amount to the largest merger in UK financial services for a long time. As well as asking if this could really happen, we need to conside whether such a development would be in the long-term economic interests of the country. Would we just be further inflating the house price bubble and greating a greater level of personal indebtedness, increasing exponentially as it gets passed through the generations?
Before that, we need to spend a little time getting to understand the nature of the BOMAD beast. The L&G study explains its genesis well by, firstly, highlighting the extent to which house price growth has exceeded wage inflation, making homeownership steadily less affordable, and then putting this together with the fact that baby boomers now control a significant proportion of the nation’s wealth, having benefited from the rise in house prices, a good pension and significant savings (the product of previous periods of decent investment returns and higher saving rates). It is not unreasonable then that the younger generation want to tap into this resource and they have been doing so in their droves. Over 300,000 are expected to use money from the BOMAD to buy a house this year (amounting to £77 billion of property). Currently a quarter of all homeowners say that they have benefited from the BOMAD and this proportion is expected to rise to 33%. Of course there is a limit as to how much parents can find from their savings, but when you consider that only 3% of the over-55s who own their homes have utilised any equity-release strategies, that limit is a long way off.
For banks this must be very frustrating – the BOMAD is offering terms that they can never compete with, as they are, by definition, uneconomic. However, recent new products suggest that banks are trying to tap into the BOMAD so that they can re-energise their mortgage lending businesses. Barclays has come up with a new 100% “Family Springboard” mortgage that does just this. It is not surprising that young people are struggling to generate the cash for a deposit for ever more expensive housing, and the Barclays’ product solves this by not insisting on a deposit – instead it asks for members of the borrower’s family to put up to 10% of the purchase price into a separate account, only to be drawn upon if the borrower misses a payments. For this the providers of the “deposit” receive a relatively generous interest rate of 2%, which is tough to find elsewhere. For the bank this makes sense as they are charging 2.99% on the much larger mortgage sum. As for the borrower, they have an opportunity to access the housing market without giving up any rights over the property to their helper (who is not regarded as a guarantor). The downside is that this is not the cheapest mortgage product on the market and, once the 3-year fixed period rolls off, the borrower will be subject to both the prevailing rate environment and the extent to which Barclays wishes to be competitive. Nevertheless, if this takes off, Barclays and others will be effectively merging with the BOMAD to provide mortgages and, if that is deemed an attractive proposition, will be helping to tap previously unutilized savings of the baby boomers.
Nationwide seems to be going a step further. The press has interpreted their move to extend the maximum age of mortgage maturity to 85 as being an acknowledgement of the difficulties people will have in repaying them earlier. However, given the financial comfort levels of many baby-boomers, I think that this will be another way of tapping into the resources of the BOMAD given that, by maintaining their own mortgage, older people will be able to loan or gift money to their children or grandchildren – effectively an equity release scheme.
It is here that we have to ask whether this union of commercial banks with the BOMAD is a solution to the problem of getting young people onto the housing ladder. The simple answer has to be “of course not”. Yes, there will be a lot of young people who can benefit from the more formalized process of tapping into family resources, but the fundamental housing issue – that of a shortage of supply – will not be resolved in this way. Finding fresh ways of releasing the nation’s savings for the purposes of extending the house price spiral is more likely to make the problem worse. Houses will get yet more unaffordable, and, for those that have bought them, the level of debt will increase with the danger of its being passed, ever greater, through the generations. There is also the obvious issue that none of this will help those unable to tap into family resources, thereby further exacerbating economic divisions in our society.
Legal and General have their own suggestions to resolve the underlying problem, which involves a promotion of the use of modular housing. This makes much more sense than increasing ones debts to both banks and the family, but it is unlikely to develop to the extent that it undermines house prices any time soon. For now, ever increasing prices supported by spiraling debt just gives a fresh nuance to the poet Philip Larkin’s view of what our mum and dad do for us.
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