20 years ago it was fairly commonplace to buy your first home when you were in your mid-to-late 20s. However, a combination of soaring house prices, climbing rents and, recently, rampant inflation means it has harder than ever to get a foot on the property ladder.
These days, the average person won’t typically buy their first home until they are in their mid-30s, according to comparison site Finder.com, highlighting just how tough would-be homeowners currently have it.
Thankfully, the Bank of Mum and Dad has stepped into the breach in many cases, funding £10bn, or roughly half, of all first-time buyer purchases last year, according to Savills. While that should be surprising, it isn’t, especially when you consider the average first-time buyer deposit has rocketed 154% to £62,600 since 2005, according to UK Finance.
For the average first-time buyer, it means having to save for an average of eight to 10 years for a deposit, unless of course they receive financial help from their parents.
That’s the issue: not everyone has parents who have the means to help them build up a house deposit. The trouble is lots of parents are asset rich but cash poor, meaning they have plenty of property wealth but do not have the available liquidity to offer a cash gift.
It is why we are seeing an increasing number of parents in their 50s and 60s tap into the wealth tied up in their home, either through equity release or a retirement interest-only (RIO) product. While that may work for some people, it’s less than ideal for parents who want to leave an inheritance or who don’t have the means to pay the interest on a RIO.
But what if there were a product that bridged that generational wealth gap? A product that allowed parents to release the equity in their home to give to their children without leaving them nursing an additional financial burden.
At the moment, no such product exists, but if it did it could be transformational for those who don’t have parents who are well-off.
The Industry Panel for Financial Advice (IPFA), an exclusive group of leading advice firms working closely with Sesame Bankhall Group, came together recently to dream up ways of helping more young people get onto the housing ladder.
While we agreed there was no single solution to the problems first-time buyers face, we were united behind the idea that a new type of intergenerational product should form part of the answer.
As I’ve outlined above, an increasing number of parents are turning to equity release or RIOs to help their children onto the housing ladder. While both of these products achieve the desired outcome, it is a very informal agreement that leaves the parents with a financial burden to manage in many cases.
A hypothetical intergenerational mortgage, on the other hand, would formally link either equity release or a RIO with a first-time buyer mortgage. If the product were designed so the children paid the interest, not only would they protect their inheritance, they would also relieve their parents of any additional financial burden.
Of course, there are hurdles to clear and challenges to overcome to make such a product work, namely how you underwrite a product like this. However, lenders would need to check that first-time buyers could afford not just the first charge loan but also the interest on their parents’ equity release or RIO.
With this in mind this product concept would probably be best suited for first-time buyers who would pass a lender’s affordability test but who have a limited deposit, an issue often seen in London and South East.
There are also advice issues to consider, as the loan straddles both the residential mortgage and equity release markets. In order to pave the way for a product like this, we would need to find ways to address the issue of ‘advice silos’.
But those hurdles are far from insurmountable. And the effort involved in bringing such a product to market would be far outweighed by the impact it would have on the thousands of young people currently locked out of the market.
As an industry, we owe it to them to try, at the very least.
Stephanie Charman is strategic relationships director at Sesame Bankhall Group