The Bank of Mum and Dad is a Ponzi scheme - and it's time for a crackdown

·5-min read

By Chloe Timperley

When property expert Henry Pryor tweeted that the Bank of Mum and Dad (BOMAD) had become a “giant Ponzi scheme”, he was referring to first-time buyers receiving help from home-owning parents. But the problem runs much deeper than that.

For too long, the home ownership dream has been conceptualised as ‘getting on the property ladder’. This ignores the fact that the ladder is broken. BOMAD now supports house purchases at every rung. Upsizing is just as hard - if not harder - than buying a starter home, and existing homeowners under 45 rely more on parents for financial help than first-timers.

According to Land Registry data analysed by Project Etopia, the price jump between the first and second rungs has more than doubled since the financial crisis. Lloyds Bank also found six in ten 'second steppers’ think moving up the ladder is harder than getting onto it in the first place. I have witnessed the impact of this first-hand. A friend of mine bought her first house after saving up while living with parents. She and her partner have since sold up and moved back in with family so they can save enough to upsize.

This is typical of the 'boomerang generation’. Research from Loughborough university revealed this week that the majority of Britain’s 20 somethings and a third of those in their early 30s still live in the family home. This is important for several reasons. Firstly, it entrenches privilege. Parents on benefits often struggle to accommodate adult working children, as the child’s earnings push up the family’s household income, triggering benefit reductions that leave the whole family worse off. Others simply don’t have the space or live too far away from the child’s workplace.

The immense privilege of living rent-free with parents is seldom acknowledged when heroic stories of first-time buyer successes are reported in the media. A 2018 headline in the Daily Mail is a typical example. It suggested a young woman accumulating her deposit through a lifestyle of extreme frugality, yet the article revealed that she’d also been able to work full-time while living at home with her mum rent-free.

By pushing false narratives about becoming a homeowner, underprivileged individuals who stay stuck renting are portrayed as failures, profligate or irresponsible. In reality, their only real 'failing’ is that they lack a cushion of family money, or free housing, to fall back on.

Another, less talked-about problem is the financial strain BOMAD lending places on parents. If BOMAD were a real bank it would be the 11th biggest mortgage lender in the UK. This finding came from a 2019 report by Legal & General, which estimated that UK parents supplied £6.3bn in home-buying assistance for their offspring in 2018, with the average parental loan or outright gift coming in at £24,100 – up £6,000 on the previous year.

Probably because of the size of such gifts, one in four BOMAD lenders are not confident their savings will last them through retirement. Fifteen per cent have had to accept a lower standard of living because of their generosity. Pensions are in fact a key source of BOMAD funding. From age 55, 25% of a personal pension pot can be withdrawn as a tax-free lump sum. L&G warns that over-55s are increasingly using this facility to gift their offspring a housing deposit, even if they can ill-afford the blow to their retirement funds.

Another popular source of BOMAD funding is the parental home itself. This is where the housing Ponzi scheme becomes most apparent. The price comparison website MoneySuperMarket found that one in six parents who remortgage are doing it to provide financial support for children, a third of whom will go on to use this handout for a housing deposit. Lenders have also begun to explicitly offer BOMAD products, where the parental home is taken as collateral for the children’s mortgage borrowing.

But if parents lack the credit score or financial stability to remortgage in the traditional sense, there is another, more insidious option: the lifetime mortgage. These give outright owners a cash sum in return for allowing the lender to take possession of their property when they die or go into long-term care. Incidentally, L&G offers these lifetime mortgages to unencumbered baby boomers as a tool for helping their children to buy a home.

Such circular finance is dangerous, because it artificially inflates property values beyond what future buyers are likely to be able to afford. Tomorrow’s 50 and 60-somethings might still be paying off 35-year mortgages, or they might need the capital 'tied up’ in their homes to augment a woefully under-funded pension pot, or to meet long-term care costs.

BOMAD poses a systemic risk, not only to the property market, but to the entire banking system. Robbing Peter to pay Paul risks mass negative equity as BOMAD becomes less solvent. No politician will want to touch this policy idea, but the unpalatable truth is that BOMAD must be reined in by the regulatory authorities.

In fact, the UK’s second biggest lender, Nationwide, has already seen the writing on the wall and restricted BOMAD gifts for homebuyers, so it may be only a matter of time before others follow suit. Lending has tightened considerably in recent months and many are now bracing for heavy falls in the housing market as the economic impact of the pandemic starts to bite.

It’s only natural for parents to want to help their children – even to their own detriment. But collectively, they are doing more harm than good. Now is the time for lenders to put a stop to the madness.