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Would you pay for someone else’s home?

Jenna TraynerThis summer one particular mortgage lender hit the headlines. Its lending power this year grew to an estimated at £5billion, which will go towards funding a quarter of all UK home purchases. As a result, it is now one of the country’s top 10 mortgage lenders.

So which big financial institution are we talking about? None other than the venerable old BMD - the Bank of Mum and Dad. According to research from Legal and General carried out this summer, over 300,000 loved ones will receive financial assistance from the BMD to get a foot on the property ladder in 2016, to the tune of £17,500 apiece.  

This should come as no surprise as, according to a Halifax study carried out in May, the average deposit put down by a first time buyer in 2016 is around £34,000, whereas in 2007 this figure was less than half that, at £16,400.

While the availability of mortgages for First Time Buyers has been improving and schemes such as Help to Buy are intended to help Generation Rent into their first home, finding that initial deposit money is often the most difficult step for young savers. Rising property prices meanwhile have benefitted older generations, many of whom are now passing this property wealth to their grown-up children.

Of course many aspiring homeowners are not so fortunate and do not have financially secure parents to turn to for help. In such circumstances there is the opportunity for the BMD to provide support to other people’s children as well.

According to the same Legal and General report over a quarter of the parents surveyed would consider doing so – although they would look to receive a return on their investment. Parents in Scotland were particularly socially minded, with 38% saying they would consider the option.  

Peer-to-peer lending, or crowdfunding as it is otherwise known, has been growing in popularity as it can offer a higher rate of return than more traditional savings routes. However this form of investment is riskier than other forms of loans, as they are generally not guaranteed by the Financial Services Compensation Scheme, meaning that defaults on a loan by a borrower are passed on directly to the investors.  

Direct lending to friends of the family may be another option, and would present other options for repayment which can be worked out between you – for example monthly instalments, or a lump sum repayment carrying an agreed rate of interest. However such lending should never be made over a handshake – it would be essential to involve a solicitor to ensure your investment is sensible and that it is well protected by a comprehensive agreement.  

As with almost any investment, returns are never guaranteed and where personal relationships become involved problems can become sticky. However, if you are confident in the objectivity of your agreement and are well-informed about the risks, such lending can offer excellent returns while giving someone a much-needed hand onto the property ladder. 

Jenna Trayner is Valuer at Pagan Osborne. For more advice on property in your area, contact your local Property Sales team, or email paganosborne@pagan.co.uk

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