Bank of Mum and Dad set to step in as high-LTV mortgages dry up

by Stephen Little from Moneywise |

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Banks have been pulling first-time buyer loans, but parents are ready to help

Lenders have been pulling high loan-to-value (LTV) mortgages because of the coronavirus pandemic, but the Bank of Mum and Dad could step in to help out first-time buyers.

Mortgage broker Private Finance says that it expects a surge in capital raising for first-time buyers as the Bank of Mum and Dad fills the void left by the banks.

Many lenders stopped offering loans to first-time buyers after lockdown measures were introduced in March, effectively freezing the market.

Those who want to buy their first home are now forced to find larger deposits and apply for lower LTV loans, which are still available.

Chris Sykes, mortgage consultant at Private Finance, says: “Curtailed lending is making it harder for first time buyers to get on the housing ladder. 

“This will lead to a surge in capital raising from parents looking to release funds to help their children buy a home by financing their deposits. 

“For those who are fortunate enough, the Bank of Mum and Dad will fill the void left by the banks not doing much in the 90-95% space currently.”

Why are lenders pulling high LTV loans?

Mortgage lenders are worried about the impact of the coronavirus pandemic and weakening job market on the homeowners that owe them money. 

Many have reacted by pulling out of what they would see as riskier areas of lending, chiefly to first-time buyers, who are at greater risk of default.

Lots of lenders are also having staffing issues as a result of the pandemic and have delays with processing mortgages.

Banks and building societies have also had to shift resources because of the volume of calls from borrowers looking to take out a mortgage holiday.

The re-opening of the housing market in May has released a lot of pent up demand, leading to a surge in mortgage applications.

So in order to deal their existing workload, lenders are having to temporarily withdraw products.

Poverty in retirement

Soaring house prices combined with stagnant wage growth are making it increasingly difficult for first-time buyers to get a foot on the property ladder.

According to the Office for National Statistics, in 2019 the average house price in England and Wales reached 7.8 times average annual earnings.

As a result, parents are now spending so much money to help get their children on to the housing ladder that they are now one of the biggest lenders in the UK.

The average Bank of Mum and Dad contribution rose by more than £6,000, to £24,100 in 2019, according to Legal & General.

Collectively parents have given £6.3 billion, making it the equivalent of a top 10 UK mortgage lender.

However, parents who are gifting money to help their family onto the housing ladder could end up facing an uncertain retirement.

Many are using their pensions and savings to help out and this could leave them facing poverty when they retire.

This article was originally published in our sister magazine Moneywise. Click here to subscribe.

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