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Bank of Mum and Dad

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20/02/2006

Many first-time buyers receive family help to get on the ladder. But how long can parents carry on supporting the market? Paula John reports

Up to half of all young first-time buyers may be receiving financial help from their parents when it comes to getting together a deposit, according to research from the Council of Mortgage Lenders (CML).

A lot of this help is likely to have come from parents remortgaging to free up equity in their own homes.

The CML has reached its conclusions by comparing the amounts first-time buyers can reasonably be assumed to have managed to save, and compared it to the actual deposits put down.

Over the past decade, the proportion of first-time buyers whose deposits were higher than their plausible savings has jumped from under to 10% to nearly 50%.

First-time buyer types

The CML identifies four disparate types of first-time buyer. First there are the unassisted first-time buyers aged under 30, who save their own deposit. They have relatively high incomes and buy relatively cheap properties. They put down small deposits, and borrow a medium-level income multiple.

Next the assisted first-time buyers under 30, who have some type of financial help in finding a deposit, generally assumed to be parental support. These tend to have low incomes, but buy medium-value properties with high deposits and high income multiples.

Then there are true first-time buyers aged over 30 (whether assisted or unassisted), who have relatively high incomes, high deposits and buy high-value properties. They borrow on medium-level income multiples.

Finally there are the returners, who have owned property before but have been out of the market for a while. They tend to have medium-level income, high deposits and low percent advances. They buy high-value properties on medium income multiples

The research indicates that the second group – the assisted first-time buyers – could be viewed as clouding the genuine affordability concerns of new buyers, and preventing the market from adjusting accordingly as a result. In effect, this group could be accused of propping up house prices.

The author of the research, CML senior statistician James Tatch, concluded:

“For some home-owners, helping out their children with a mortgage deposit may represent an efficient use of funds, in the light of low returns on alternative investments.

For others, the assistance may not represent an investment decision so much as a case of the family “pulling together” to enable the younger generation into home-ownership.

We do not know what effects any of this will have on borrowing patterns in the future. While older generations are able to raise funds from converted equity and other sources, the assisted route remains a viable option for many young first-time buyers with willing families.

But if for whatever reason these sources dry up, the importance of unassisted first-time buyers is likely to increase, and the affordability constraints they face will be brought into sharper focus.”

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