Why the Bank of Mum and Dad is now a top 10 mortgage lender

Loans or gifts from parents are necessary for some young people to get on the housing ladder, but they also serve to entrench the inequality that bedevils Britain

Borrowing off parents to buy a house has spiralled to £6.3bn

Were the Bank of Mum and Dad (BoMaD) a fully minted PLC, its chief executive would be in line for the sort of bonus people like me regularly criticise.

It’s one of the British housing market’s great success stories.

A study published by life insurer Legal & General and the Centre for Economics and Business Research found that it is now the equivalent of a top 10 mortgage lender. Its growth would make any prospective investor drool.

According to their research, the financing provided by this bank will have risen by more than £6,000 to £24,000 by the end of this year, good for a total of £6.3bn.

There are two issues this raises.

The first concerns the impact on those lending, or just as likely gifting, the money.

Many parents, and sometimes grandparents, feel a responsibility to help out, recognising the difficulties faced by their offspring if they want to get on the housing ladder in the current economic climate.

Even though the mortgage market is currently quite competitive, accessing it can still be a struggle for first-time buyers without the means to afford a substantial deposit, which is where the bank comes into its own.

Its increasing role has an impact both on those who contribute to it and upon society as a whole.

When it comes to the former, a poll of more than 2,000 adults conducted by YouGov found that while more than half (53 per cent) were able to use cash to help out, some 9 per cent turned to lump sums from their pension savings, while 13 per cent used their income from either a pension drawdown or an annuity to assist.

Over a quarter (26 per cent) of BoMaD lenders were not confident they would have enough money to see out their retirements after helping their loved ones. Some 15 per cent had to accept a lower standard of living. A small number (6 per cent) even chose to postpone their retirement.

That’s bad enough but this sort of lending, or gifting, also serves to entrench the inequality that plagues Britain. The Bank of Mum and Dad isn’t available to everyone. It lends only to a very limited, and relatively fortunate, subset of the population.

Many of those that can’t access it can’t access the housing market, leaving them at the mercy of Britain’s insecure rental market, forever at the risk of being booted out of a tenancy.

The problems faced by some parents, or even grandparents, who want to lend or gift their children can be ameliorated via financial advice and through the use of financial products such as equity release, although this is something the Financial Conduct Authority needs to keep a close eye on.

Equity release involves the use of a mortgage through which older people can access equity built up in their properties. It is typically paid off only after they die. However, it is a part of the market that has been responsible for some nasty scandals in the past.

As for the societal problem? One things that keeps house prices unduly high is a shortage of housing stock.

This is not a new problem. It is one that requires government intervention if it is to be addressed. The current cabinet of millionaires, whose members are well capable of joining the Bank of Mum and Dad to subsidise their offspring, has singularly failed on that front. That shouldn’t come as a great surprise.