March 2018
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VFS INSIGHTS



 

BANK OF MUM AND DAD: ARE YOU READY?

With parental handouts fast becoming the only route to home ownership, mums and dads need to plan ahead to help their offspring fly the nest.


As a parent, you might think you have enough to worry about with school fees, healthcare, holidays and all those other bills that dependents tend to generate. Then there's your pension provision and retirement plan. You're going to live longer, so you might have to work longer. You've got to plan for retirement in old age when healthcare costs will be greater. So, surely, getting your children safely through school is all that can be expected. After that, it's up to them. They'll survive.

Or will they? The problem is that today's young are growing up without the opportunities enjoyed by their parents. In all likelihood, they will not have access to affordable housing, defined benefit pensions and free university education.

The reality is that property price rises continue to outstrip earnings, blocking first time buyers from joining the property ladder. It would be reasonable to expect your child, as a first time buyer in London, Johannesburg or Nairobi, to require a cash stash of say USD 125,000 for a deposit on an entry level property of say US 250,000.

What is worse is that, in all likelihood, they will require this sum just as you are thinking of retiring and shortly after they leave university saddled with debts generated by tuition and maintenance fees. The cost of going to university in the UK is now over GBP 9000 per year for tuition fees alone with comparable or higher annual costs in the US.

So the truth is that as young adults, your children will need your help to get on in life and as a recent report shows, as parents, you will want to provide that help.

According to research by Legal & General published last year, the Bank of Mum and Dad in the UK is now funding more than a quarter of house purchases, making it equivalent to the ninth-biggest mortgage lender. In the UK, this year, mums and dads will lend more than GBP 6.5 billion. Most of this will go on deposits.

In Africa, the pressure to own property is arguably greater than in mainland Europe where rental prices are low and renting is the norm. While in the UK, the Bank of Mum and Dad will fund over £2.3 billion in rental payments for children who can't afford to buy, in cities like Nairobi, Cape Town and Johannesburg things are different. Renting in these cities is costly and landlords unreliable. So owning a property as soon as possible is considered the only sensible option.

Wherever you live, your offspring are going to need help. As with any inevitable cost, there is the opportunity to plan ahead. By consulting your financial adviser early, you can avoid leaving your children to fend for themselves against the odds or, worse, diminishing your estate by releasing equity from your property to help your children buy theirs. Timely adjustments to your existing investment strategy could enable you to give them a helping hand when they need it most.

 


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