Many of our clients have been homeowners for decades, but for their children getting on to the housing ladder isn’t as simple as it once was.
Sure, in the 70s, 80s and early 90s interest rates were far higher than they are today; you may recall October 1989 when interest rates hit 15%. They were still in double digits two years later.
But house prices were far lower than they are today. Nationwide Building Society figures show that the average price paid by a first-time buyer in Yorkshire & Humber, in the first three months of 2017, was £111,256, in the UK as a whole is was £177,624.
In October 1989, when interest rates peaked, the comparable prices paid were £46,483 and £48,568.
Saving for a deposit
A survey in 2015 by Which? found that first time buyers put down an average deposit of 17% of the purchase price. That’s £19,000 buyers in Yorkshire & Humber need to find, plus fees; £30,196 in the wider UK.
So, whilst paying the mortgage might be easier, because interest rates are lower, raising the deposit required is far harder. Factor in things such as student debt, and it’s not hard to see why many young people are struggling to get on the housing ladder.
Sure, initiatives such as Help to Buy and the Lifetime ISA will help, but at some point, your darling children may come calling on the ‘Bank of Mum & Dad’ or its sister organisation, the ‘Bank of Grandma and Grandad.’
Research from Legal & General shows that 57% of people under the age of 35 had financial assistance from family or friends when buying a house. The same research showed that in most cases (57%) this money was a gift, in a fifth (18.3%) though it was an interest free loan. In a small minority of cases (4.8%) it was a loan but with interest charged.
Can you afford to help your children?
The thought of helping our children, or grandchildren, with their first home is likely to trigger conflicting emotions. Many, perhaps even most parents, will naturally want to help their children as much as possible. The thought of children living at home well in to their 30s is unlikely to be palatable for child or parent!
We are not talking about insignificant sums of money here. The heart can’t rule the head, which should be asking rationale questions such as:
- Can we afford to help?
- If we do help how will this affect our future plans?
- Will we still be able to retire as we hoped?
- Should we help out as a gift or a loan?
This is where financial forecasting can help.
A carefully constructed forecast can project your financial future forward, considering dozens of variables to help you understand the likelihood of meeting your long-term financial objectives.
These variables can of course include helping your children financially to buy their first house.
A financial planner could analyse the effect on your financial future of handing over a large sum of money to your children or grandchildren and answer the questions we have outlined above. The result of the forecast may give you the confidence to help your children, safe in the knowledge that your own financial future is still secure.
If it shows that the effect on your finances is too severe, you could run alternative scenarios, for example a loan, repaid before you retire.
What it will allow you to do though is decide based on evidence, not a whim, or gut feel. The head and the heart will work in tandem to come to the right decision for you and your children.
We firmly believe in the benefits of financial forecasting.
It allows our clients to make decisions based on clear evidence and understanding exactly what the effect of a certain decision will have on their own financial future.
If you are facing a tough financial decision such as this, where the head may be telling you one thing, and the heart another, you need the facts before making a decision.
If you would like to know more about financial forecasting, please do not hesitate to get in touch.
This article is the first in a series to highlight key issues our clients face and how financial forecasting can offer part of the solution.
We know the benefits it brings to our clients and how, as part of a comprehensive financial plan, it can help you achieve your goals and objectives.
To learn more about financial forecasting call us on 0113 262 1242.