Those getting financial help receive an average of £25,000,
making up almost half of their deposit. These wealth transfers
help many of those who receive them to purchase a home sooner,
while also enabling some buyers to put down a larger deposit as a
proportion of the house price, substantially reducing their
mortgage interest payments.
These are among the findings of a new IFS report, funded by the
Economic and Social Research Council, examining the patterns of
financial help for first-time home buyers. Other key findings
include:
Homeownership rates have fallen steeply in recent years,
in particular for those whose parents don’t own their own
home:
- The homeownership rate for those aged between 25 and 39 whose
parents owned their own home fell from 60% in 2009 to 51% in
2019. Among those whose parents rented their home, it fell from
40% to 22% over the same period.
- This means that the children of homeowners are now over twice
as likely to be homeowners as the children of renters.
Parental assistance plays a significant role in driving
homeownership inequalities:
- Over half of those with university-educated homeowning
parents received transfers when buying for the first time, with
receivers getting an average of around £35,000. Of those whose
parents rented their home, only 29% drew on financial help when
buying their home, with receivers getting an average transfer of
just £11,000.
- Differences in financial resources, including assistance
received, can explain almost half of the difference in home
purchase rates between those with better-off and worse-off
parents, holding incomes and ages constant.
- Among first-time buyers receiving financial help, those in
the South East received an average of around £31,000, while those
in the Midlands received £18,000 on average and those in the
North received £17,000.
Financial transfers can have a particularly large effect
on the ability to afford a house for those who have relatively
low savings:
- For almost two-thirds of first-time buyers, each £1,000 they
receive from parents increases the value of the house they can
buy not by £1,000 but by £10,000, assuming they must put down a
10% deposit. This is because their low savings restrict the
deposit they can put down and determine the most expensive
property they can buy.
- Those first-time buyers at younger ages, with less-wealthy
parents, and living outside of the South East are more likely to
be held back by their low savings in this way. For these people,
transfers have a more transformative effect on what they can
afford.
Rather than just helping people to be able to afford to
buy, financial help is often used to put down a larger deposit.
This tends to have very high financial returns because it reduces
the interest rate paid on the whole mortgage:
- Among those who receive a transfer when buying a house, each
additional pound received in transfers is associated with putting
an additional 77p down as a deposit.
- Using a typical transfer of £25,000 to put down a deposit of
25% rather than 10% of the house value would reduce the
repayments on a typical five-year fixed rate mortgage taken out
in 2018 by £8,500. This compares to a return of around £850 if
putting this in a typical cash ISA.
- As a result of this, financial help is likely to drive
increased wealth accumulation for those who receive more,
compared to those who receive less or nothing.
Bee Boileau, a Research Economist at the IFS,
said:
‘The Bank of Mum and Dad has played an important role in helping
those with richer parents move onto the housing ladder at the
same time that increasing prices have pushed this further out of
reach for those without family help. For those with a large
enough income to secure a mortgage but not enough savings to
cover a deposit, financial help from family can have a
transformative effect on what they can afford to buy. But the
role of parental transfers extends beyond just making
homeownership possible. First-time buyers who receive larger
amounts in transfers tend to use this to put down larger deposits
rather than buying a more expensive home. This can have large
knock-on effects for wealth accumulation because it reduces the
interest rate paid on the whole mortgage they take out, widening
wealth differences between those who receive more and those who
receive less.’
