BOMAD to Lend to Other People’s Children?

No joy with the Bank of Mum and Dad? Try Asking Someone Else’s Parents to help you buy Your First Home.

In reporting a previous Legal and General survey into the Bank of Mum and Dad (BOMAD) – (‘Bank of Mum and Dad to Review its Lending Policy’ – DIY Investor 5^th May) said that the £5 billion p.a. lent or gifted by parents to prospective homeowners would make the fabled institution a top 10 mortgage lender.

Now, a further survey by the financial giant suggests that parents may be reaching beyond their own offspring with 27% of those polled saying that they would consider funding other people’s children onto the property ladder in exchange for a return on their investment.

Each year, 300,000 people receive a financial leg-up and in 80% of cases the assistance comes from parents; 10% are funded by grandparents and a further 10% receive help from other family members.

‘27% of those polled saying that they would consider funding other people’s children’

But now, according to Legal and General’s Stephen Smith, some parents would consider reaching out to nieces and nephews, godchildren, their friends’ children and even strangers.

There is no firm evidence to suggest that this willingness has yet become a reality but mortgage experts believe that with interest rates so low for savers, parents lending to children other than their own, could be an interesting opportunity.

At first glance such an arrangement looks as though it could be attractive – giving people with money a place to invest it with a decent return, and giving first-time buyers an all important fillip.

The mortgage market doesn’t currently support such a model – the closest thing is peer-to-peer lending which allow people to invest small sums of money in the buy-to-let market.

However, Stephen Smith believes that today’s low interest rates may be the stimulus required to drive innovation in the market: ‘It will take bright people coming up with some innovative ideas to get some schemes in place’ he said, reflecting that there’s been very little innovation in mortgage lending for the 40 years he has been in the industry.

Sue Anderson, of the Council of Mortgage Lenders, is cautious, noting that an appetite to invest savings in this way is not the same as actually doing it, and warns that it is ‘very easy to inadvertently act in a way that’s not compliant with the law’.

But Ray Boulger, a mortgage expert with John Charcol, believes thats there are already a small number of schemes that could be adapted to accommodate this new idea.

A key challenge will be to find a way to keep an investor’s money safe while offering a good enough return to tempt them to do it – the typically loose arrangements that may exist between parent and child will not suffice.

Those relying on the return on their investment for income are unlikely to have much truck with skipped payments because ‘it’s Christmas and we’ve had a lot of expense this month’.

‘I don’t think people will do this out of the kindness of their hearts – it’s tough enough supporting your own children,’ says Mr Smith. ‘Parents will need to compare the sort of return with what they could make from cash ISAs or the like.’

‘If you are lending to strangers’ he continued ‘you would need someone to take an informed judgement on their suitability as borrowers, which is why an institution needs to be involved, whether a bank or building society or peer-to-peer lender. And you need to be satisfied there is an established infrastructure in place, preferably covered by Financial Services Regulation.

‘If you’re lending to nieces, nephews or godchildren, simply gifting the money or making a soft loan should be straightforward, but it may still be worth taking legal advice,’ says Ray Boulger.

‘there is always the risk of damaging a friendship or relationship’

There are a number of considerations when lending to people you know that go beyond those normally associated with an investment, and there is always the risk of damaging a friendship or relationship.

Where priorities differ, a missed payment could be all the more galling if the lender strolls past to see a new car on the drive of the house they helped to purchase; time may also be an issue – the money is not liquid and might be tied up for a long time..

Overall, Stephen Smith considers BOMAD to be generally a negative phenomenon, indicating that people are struggling to save up for a deposit, and perhaps not something society should encourage.

However, with savers having been dealt a further blow with the recent revelation that the Help to Buy ISA bonus cannot be used as part of their deposit on their first property (‘The Not Much Help to Buyers ISA’ – DIY Investor 21^st Aug) and savings and investment rates starting to bear the brunt of recent cuts to base rates, it may be that where there’s a will there’s a way.

.
Where priorities differ, a missed payment could be all the more galling if the lender strolls past to see a new car on the drive of the house they helped to purchase; time may also be an issue – the money is not liquid and might be tied up for a long time.
Overall, Stephen Smith considers BOMAD to be generally a negative phenomenon, indicating that people are struggling to save up for a deposit, and perhaps not something society should encourage.
However, with savers having been dealt a further blow with the recent revelation that the Help to Buy ISA bonus cannot be used as part of their deposit on their first property (‘The Not Much Help to Buyers ISA’ – DIY Investor 21st Aug) and savings and investment rates starting to bear the brunt of recent cuts to base rates, it may be that where there’s a will there’s a way.