2018 saw parents in the top 10 UK property financiers, but does their support mean longer term and unforeseen ramifications?
Over the last few years, as property prices have risen at a much faster rate than income, the bank of mum and dad has become one of the UK’s leading mortgage providers. Figures in 2018 put parents in the top 10 financiers. Meanwhile this year, according to research by Legal & General, has seen that trend continue, and it is estimated they will lend more than £6 billion over the course of the year – a percentage up 10% on last year. Their intention is clear: they are helping their children get onto the property ladder years earlier than they otherwise would. However, is the shorter term family support leaving parents with longer term and unforeseen ramifications?
Any longer term impact is because parents are funding their borrowing from a variety of sources, and while their use of cash savings, borrowing against their own homes, or withdrawing money from their pension plans are all possible, there is an opportunity cost to the funding. This has the potential to cause problems for future financial and retirement plans, not least because we are all living longer and annuities are no longer the automatic choice.
Apart from the general risk of not being able to keep up repayments, taking money from your investment portfolio means you run the risk of losing out on any growth and the compounding benefits that investments typically carry, as well as any future benefits from bond coupons or equity dividend payments. The potential rates of return on investments are generally higher than the return on cash, but it is always worth remembering that markets can go down as well as up and you may not get back the original amount invested.
Meanwhile, accessing your pension pot – which you can do from the age of 55 – may mean you don’t achieve all of your retirement goals. The money taken out of a pension will not be there to grow and that growth cannot compound, but perhaps more importantly, if you access your pension, the amount you can pay in while enjoying the government’s tax incentives could reduce from up to £40,000 a year to just £4,000. The lower tax support may mean that you need to put back your retirement date to be able to fully enjoy the life you want.
The good news is that there is an alternative for parents with investible assets over £1 million as they can access the bespoke lending options available through private banks. Not only can loans be secured against your property and investment holdings, but the support you receive can ensure you understand the full implications of any decision and the impact it will have on your long-term financial goals. As a result, you can retain your capital and continue to benefit from your wealth while helping your loved ones with their more immediate needs.
What are the options?
As private banks operate on a more personal case-by-case basis, they can offer a much more flexible approach for larger loan amounts, usually over £250,000. Their more tailored service often includes a dedicated relationship manager, who will take time to understand your current financial position and any long-term plans before providing the most efficient outcome for you.
They are not constricted by tick-boxes or standard 25-year repayment models so can offer a wider range of options. For example, much shorter repayment terms, interest only elements, or scheduled repayments that can be linked to future releases of funds which will occur on a specific date. However, it is still important to remember that if you don’t keep to the agreed repayment terms, the property may be repossessed.
Last, but definitely not least, the speed of response is another possible benefit, which is particularly advantageous when negotiating on a property. Bespoke lending can raise cash against your residential property, as well as any investment portfolios you may have, provided the bank has custody. This means they can make quick, yet carefully considered, decisions to meet an immediate need for cash, without you having to sell any of your investments.
At Nedbank Private Wealth, multi-generational relationships are really important to us. So we work with you and your family to offer the appropriate support at whatever stage you and your family are in life. Our flexible lending facilities can be arranged in sterling, euro or US dollars, although any property used as security must be UK, Isle of Man or Channel Island-based. To find out more about our bespoke lending services, please complete the form below, or contact your private banker or our client services team on +44 (0)1624 645000.
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Andrew joined the Nedbank Private Wealth team from Lloyds Offshore Banking Group in 2005. His aim is to provide high-net-worth individuals and their families with the highest level of service at all times, working to fully understand their wealth requirements and provide the most appropriate solutions. Day-to-day discussions could be centred on investment solutions, foreign exchange transactions, borrowing, deposit taking, as well as trust and corporate structures depending on what the client’s needs are. Andrew is a Chartered Wealth Manager and a Chartered Fellow of the Chartered Institute for Securities & Investment.