Are your children banging on the doors of the Bank of Mum'n'Dad? Recent research from industry lobby group the Home Builders Federation shows that 80 per cent of first time buyers receive some kind of financial help from their parents. For the remainder whose whose parents are less rich, or less generous, the average age is 38. So if you want your ageing brood out from under your feet, the temptation is to plug the deposit gap.
Even if you can afford to, should you? The average deposit required by mortgage lenders is currently £33,000. For parents reluctant to gift this amount to get shot of their offspring, Lloyds has recently launched its Lend a Hand mortgage. First time buyers come up with a 5 per cent cash deposit, and their parents place a further 20 per cent of the purchase price on deposit with Lloyds. This way, the Bank of Mum'n'Dad receives 4.1 per cent gross on their lump sum, and their darling son or daughter benefits from a lower rate of interest on a 95 per cent loan.
Receiving interest payments will make this a palatable option for some families. But should parents who loan home deposits bank on getting any of their money back?
Along with the government-backed HomeBuy Direct scheme used by Britain's housebuilders (see feature, left) parents are relying on house price inflation to get their money out. But what happens if house prices remain static – or worse, fall - over next five years?
Depending on their personal circumstances, Mum'n’Dad might be happy to extend the loan and leave their cash tied up in an illiquid property deal. But if their children have used shared equity products like HomeBuy Direct to get on the housing ladder, their options are limited.
Borrowing 30 per cent of the purchase price will get them on the ladder. But what happens when they want to move, have a family, or split up with their partner? As the loan is repayable when the property is sold or refinanced, HomeBuy customers could find themselves unable to trade up unless they can save up enough money to bridge the equity gap on their next purchase.
Yet HomeBuy assistance is meted out to those who show a prodigious inability to save. A 100 per cent mortgage in all but name, it is no surprise that lenders are now insisting that borrowers have a 5 per cent cash deposit. What’s taken them so long?
I first raised concerns about the industry's growing reliance on the model in the Investors Chronicle a year ago. Today, rely on shared equity, and report a figure of 14 per cent, and 9 per cent. says shared equity is a "significant contributor to volumes", and has £21m of shared equity assets on its balance sheet, up from £6m a year ago.
There are two problems for housebuilders. Firstly, government support for shared equity may not continue beyond September of this year. This will hit sales volumes, and increase reliance on their own shared equity schemes, which are more capital intensive. Secondly, how long will it take them to get their money back?
As HomeBuy requires borrowers to pay back a floating percentage of the property price, moving will not be easy, even if prices rise. Let’s assume that a buyer who has borrowed a £30,000 deposit to purchase a £100,000 property sees its value swell to £150,000 in five years. When they sell, not only will they will have to repay £45,000, but property prices on "trading up" stock will have also risen. Assuming they have not made any serious progress paying off their 70 per cent mortgage, and had little or no equity to start with, how can they move on?
Buyers could be faced with no option but to return to renting, or having to stay put indefinitely (the HomeBuy rules are strict, and renting to third-parties is not allowed). KBC's real estate analyst Robin Hardy argues: "It's creating a cul-de-sac that buyers won't be able to get out of."
One of the few analysts to take the issue seriously, he believes that shared equity schemes are sucking in buyers who shouldn't own property in the first place. "The upshot is that natural renters or social housing tenants are being brought into a pseudo-home ownership situation."
If you are considering opening the bank vault doors to your children, think very carefully about what will happen if you need the money in the future. And if your children are considering using HomeBuy Direct to get on the housing ladder, may I suggest that you give them the number of a reputable letting agent instead.