As younger generations struggle to get on the property ladder, more parents and grandparents are thinking about lending them much-needed cash. But it’s a decision that can be fraught with confusion and doubt.
It’s common for you to want to help your child or grandchild financially but for worries to creep in. You may be concerned about how it will affect your financial security in the long term. Or how the money will be used.
You’re not alone. Almost a quarter (24%) of parents aged 55 and over are concerned they lack the financial know-how to lend to their children safely, according to research from Key.
If this is the case, you may be torn about what to do. On the one hand, you want to support the next generation with their home buying ambitions by providing a deposit. But your head might be thinking of the ways it could have a negative impact.
16% of parents say helping their children has affected their own finances. And 78% are worried that supporting children financially could leave them in financial trouble later in life. But taking the right steps can give you the confidence to offer financial support without compromising your own security.
1. Speak to your children about the money
For the Bank of Mum and Dad, the first step is to decide if the money will be a gift or a loan. Whichever option is right for you and your family, having a discussion is important. It allows both you and those benefitting from your generosity to plan for the future.
It’s easy for miscommunication to occur if you’ve only spoken about the money briefly or in passing. As a result, having a discussion is crucial. Be clear about areas such as:
- How much will be given to them
- Whether it will need to be paid back
- When it will be given
Starting this conversation is also a step that can lead to our next point.
2. Set out any conditions
If you want to set out conditions when gifting or loaning your loved ones’ money, you’re not alone. According to further research from Key:
- Nearly half of over 55s planning to help out adult children said they want to ensure the money is not squandered
- A fifth (22%) plan to set specific rules on how any money is spent
- A further 36% will discuss with their children how the cash will be used before paying out
It’s understandable that you want to know how the money will be used. If you’re lending the money for a house deposit, topics such as who will benefit from the money and, if your child is buying with a partner, what will happen to the deposit should they split up are important.
3. Speak to a financial adviser
If you’re worried about how taking a lump sum out of your current assets will affect you in the short, medium and long term, speaking to a financial adviser can help.
We’ll help you forecast how the decision will impact your security. If your heart is saying yes to providing financial support, but your head is unsure, it can give you the knowledge you need to move forward. By looking at how it will affect your personal income and security, you can have peace of mind that you’ve made the right decision.
Furthermore, a financial adviser can help you see where the money you’re giving to loved ones should come from. You likely have more than one option, such as taking a lump sum from your pension, dipping into savings or using some of the money that’s in your property. You may even choose to take money from multiple sources.
By looking at your finances, we can help you decide where to take the gift or loan from based on the projected impact. This will be dependent on your assets, lifestyle and personal goals.
4. Seek legal advice
With the above in place, now may be the right time to seek legal advice.
As you’re lending to children or grandchildren, you may decide to make the agreement informally. But opting to speak to a professional and draw it up formally does have its advantages; especially if you’re lending the money and expect it to be repaid.
However, only 15% of Bank of Mum and Dad agreements are done formally, according to the Post Office. More than a quarter only make a verbal agreement for loans. Seeking legal advice can clear up any potential issues and ensure that everyone is on the same page.
Some 82% of millennials who took a loan from their parents were initially reluctant. Among their concerns were:
- The conditions applied (23%)
- The loan affecting the relationship (20%)
- Payment schedule (20%)
Worries aren’t limited to loans either. 71% of millennials receiving a financial gift to help them get on the property ladder had concerns too. Seeking a formal agreement can give you all the confidence needed to proceed.
If you’re considering lending or gifting significant sums to your loved ones but concerns mean you’re struggling to reach a decision, we’re here to help you. We can help you see how taking a lump sum out of your assets will affect your financial security and that of your loved ones.