Financial education is a crucial part of any child’s development. However, with research revealing that the UK’s debt levels rising year on year, it’s beginning to look as though not enough is being done to ensure a future of smart spenders.

Financial Literacy

The concept of ‘financial literacy’ has once more become a cause for widespread debate in the UK, with millennials and those following them now being labelled ‘generation debt’.

While there are services and support in place to help Brits better understand how to manage their money, a culture of easy-access finance and convoluted contract leasing terms has left many people in a position where it’s unlikely they’ll ever be totally debt-free.

To put the situation in perspective, research conducted by credit reporting experts Credit Angel has found the following eye-opening personal finance stats:

• The average person in the UK owes £8,000 (this is on top of any mortgage debt)
• 50% of the UK’s population is considered financially vulnerable
• 25 to 34-year olds are the most likely to be saddled with debts
• Over 4 million people in the UK are thought to be in serious financial difficulty
• More than 6 million Brits don’t believe that they will ever be debt free

Is the UK Financially Illiterate?

Looking at these findings, it’s clear that something is missing from people’s understanding of financial management. This is a skill that should be taught from an early age and, as of 2014, the UK government introduced lessons on this very concept into the school curriculum.

While there is a lot of emphasis placed on the practical applications of students’ knowledge, 65% of UK teachers believe the current approach is ineffective.

As the way in which we interact with goods, services and the concept of money change rapidly – it’s leaving schools to play catch up. With this in mind, it’s not really surprising that during the first six months of 2017, 64% of calls to debt management charity StepChange were from people aged under 40.

Generation Debt

Education is inextricably tied to an understanding of personal finance, with a lot of peoples’ first experiences of debt coming from their time in university. For instance, many students from the poorest backgrounds, who often need more support in the form of loans, will graduate owing over £57,000.

As interest charges start as soon as the course begins, students will accrue, on average, £5,800 of additional debt by the time they have graduated. This is one of the many financial realities younger people are often not fully warned about when taking their first steps into adulthood.

From student debt to credit cards, the total UK credit card debt hit £70.1bn as of the end of 2017. That equates to £2,579 per household. For a card with average interest rates it would take a staggering 26 years and 3 months to pay off each household’s debt with minimum monthly repayments.

While it’s not an exclusively millennial problem, there is an undoubted trend towards people in that age range suffering the most in terms of financial issues. It’s clear that something needs to be done to practically educate children in the implications of financial products and the issues that can be caused by debt.

However, we may have to wait a while longer for a real solution. As of the start of 2018, net lending to individuals in the UK increased daily by £126.8m and the total amount owed out by Brits was £1.57bn. According to the Citizens Advice Bureau, they are dealing with almost 3,000 new debt problems each day.

As this trend towards the UK as a nation of debtors continues, it’s clear that steps must be taken to better educate Brits on money management from a young age to avoid a cycle of personal debt that will continue for generations.

The UK’s festival season is getting underway and although Glastonbury is absent from the scene this year, music fans still have plenty to choose from. Festivals have become big business, with ticket prices ranging from under £60 to hundreds of pounds, depending on the level of luxury. Equifax outlines ticket and travel costs for festival goers to help people know how much to budget.

According to a latest survey, the average UK festivalgoer spends £354.54. Equifax’s own research shows that it’s easy to spend hundreds on a festival, before even considering food and drink for the weekend. However, despite the cost, 82% of festival goers think it is good value for money.

For instance, hard rock and heavy metal festival Download offers a weekend arena-only ticket for £175 or £200, including three nights of camping. Meanwhile, the Isle of Wight Festival offers a weekend adult ticket for £209, whilst the student ticket is £175. However, festival goers have to factor in an extra £31 per person for the ferry. On top of the ticket, music fans need to budget for travel – coaches to various locations can range from £37 to £97, depending on the distance. Train costs are usually higher.

Alternatively, music fans can cut costs if they live near a city and choose one of the city park festivals, such as Manchester’s Parklife or TRNSMT in Glasgow. Parklife offers day tickets for £65 or a weekend pass for £109.50. TRNSMT is £59.50 for a day pass or £155 for three days.

More and more festivals are now offering luxury and VIP or experience ticket options, which really push the price up. For those who don’t like roughing it, ‘glamping’ options include more luxurious bell tents, which are already erected and include lavish furnishings, such as sheepskins and even plugs and hair straighteners. The prices range from a pre-pitched tent at £13.63 per night at Bestival, up to £481.50 per night for their bell tents and tipi experiences.

In addition, families have more choice of kid-friendly festivals. However, it’s worth considering that teens get a reduced rate, and children get in for free at some festivals, whilst others charge for kids as young as four, so it’s worth doing some research.

Lisa Hardstaff, credit information expert at Equifax, comments, “Music festivals have become a big part of the British summer, with new ones cropping up often. The prices of tickets go up every year. The cost of the entry ticket is just the start, with travel and extras such as parking or camping access all adding to the total cost.

“Once people are at a festival, they need to consider the costs of food and drink, which add a considerable amount to what they end up spending. The average main meal could cost around £10 from a festival catering venue – this can add up over three or four days. We suggest setting a budget and estimating the overall costs, including travel and daily spending on food, drink and optional extras – such as glitter face paint, clothes or souvenirs. With a bit of planning, people can look back on a festival of happy memories, rather than counting the cost weeks or even months later.”

(Source: Equifax)

Online research from Equifax reveals over half (51%) of Brits under 45 years old would be interested in banking products or services from technology giants like Apple, Amazon or Google. Of those, 45% said that products or services like loans, credit cards or current account from these technology companies would only appeal to them if they offered better value than their existing bank.

Across all age groups, the level of interest in banking products from leading technology firms falls to 40%, with over a quarter (27%) of Brits stating they would rather use their existing bank as they’re more familiar with them.

Jake Ranson, Banking and Financial Institution expert and CMO at Equifax Ltd, said, said: “The recent announcement that Apple is joining forces with Goldman Sachs to launch a consumer credit card highlights how tech companies plan to shake up the banking industry, creating products and services to compete against the big high street banking names as well as newer digital entrants.

“Although a sense of brand familiarity pins many people to their current bank, there’s an appetite for new products and a desire for alternatives that can offer something genuinely different. The tech giants have a loyal brand following in their own right, if they can combine this with a competitive product offering we’ll see an interesting shift in dynamics as the fight to attract customers heats up.”

(Source: Equifax)

Lendingblock, the first cross-blockchain securities lending platform for cryptocurrency, has released research into attitudes towards cryptocurrencies, which reveals that most people believe cryptocurrency is here to stay. Despite the pervasive narrative of the indeterminate future of cryptocurrencies, the survey of 2,000 people through personal data and insights platform CitizenMe found that more than one in five (21%) of respondents already own or have previously owned cryptocurrency. Furthermore, the majority (55%) believe cryptocurrencies will be widely accepted in shops and even on the bus by 2025.

According to the survey, the majority of people would use cryptocurrency, and are positive about its future. While only 20% could say for sure that they think they are a good investment, 56% said they would be tempted to buy them in future - a contradiction that suggests that there is an appetite if the risk was reduced. When asked what would make them more likely to buy cryptocurrencies, better security ranked highest (32%), followed by better apps for buying and selling (28%), and government backing (23%).

Steve Swain, Co-Founder and CEO of Lendingblock said: “In spite of much discussed uncertainty about cryptocurrency, the public is sure that cryptocurrency is here to stay. Cryptocurrency is a maturing market, and this is exactly what we would expect to see happening at this time as we move from early-adopters to more mainstream awareness and use.

“Before we get there, however, cryptocurrency need to be made safe, and that’s why we welcome the UK Government’s recent recently announced inquiry into investments. What’s interesting, is that this survey shows that the public and the market are aligned in what they think the cryptocurrency market needs next: which is more security, infrastructure and better tools. This is undoubtedly the next step of evolution for the market.”

Other key findings of the research include:

• A considerable gender divide, as nearly 30% of men surveyed currently or have previously owned a cryptocurrency, as opposed to just 13% of women
• A remarkably close alignment between those who identify as “millennials” and those who identify as “household decision makers” in terms of cryptocurrency ownership (22% vs 19%), whether they’d be tempted to buy cryptocurrencies in the future (56% vs 55%) and whether cryptocurrencies will be widely accepted by 2025 (56% vs 55%). In fact, more millennials think that cryptocurrencies will be a passing fad than household decision makers (19% vs 17%)
• Only 10% of people said they would never buy cryptocurrencies, no matter what

“These demographic breakdowns give an interesting insight into where cryptocurrencies have taken hold first,” said Linda Wang, co-founder and COO of Lendingblock. “While you might have guessed it would be millennials, in fact cryptocurrency is an incredibly serious and potentially lucrative market that is getting considerable interest from financial services, which is what is reflected here.

“The gender balance within cryptocurrencies is something I personally care a great deal about, and we at Lendingblock have been working hard to further inclusivity. However, I think there is great potential in cryptocurrency because - unlike traditional financial services - there are no barriers to entry. The “old boy’s club” on the trading floor does not exist in cryptocurrency, you can invest from your home and this has massive potential to open up the market to new entrants.”

(Source: Fieldhouse Associates)

Below Simon Cadbury, Director of Strategy and Innovation at Intelligent Environments, answers a question many have been asking themselves for years now, what is the actual difference between a building society and your regular bank?

Becoming an adult is an important moment for anyone. However, it’s perhaps now significantly less so for the millennial generation, a demographic that views travelling abroad as their biggest priority ahead of home ownership, buying a car, and even paying off debt.

In fact, recent research has also found that most millennials only see themselves as an adult once they have turned 30 years old, with some even agreeing that 40 is a more reasonable estimate.

And this delay in ‘becoming an adult’ is having a significant impact on this generation’s knowledge of financial planning – frequently resulting in a lack of clarity when it comes to getting the best deal in the retail banking sector.

The Building Society Enigma

Building Societies are one example of organisations that remain a mystery to millennials. Our research, which surveyed 2,000 UK millennials on their attitudes towards the building society sector, discovered that very few knew the benefits of opening a building society account.

Worryingly, just under half (48%) were unable to name a single advantage, with a third (33%) agreeing that they could see no reason to use a building society.

Part of this uncertainty lies with millennials’ confusion around the difference between a building society and a bank. Around three-quarters (73%) admitted that they did not know the difference between the two, while nearly half (45%) unsure of when or in what circumstance they’d use a building society instead of a high street bank.

The Difference

So, what exactly is the difference? Key to understanding the distinction between banks and building societies is to be clear on exactly how, and for who, they operate. Because banks are listed on the stock market, they are businesses and therefore work in the favour of those who invest in them, specifically their shareholders. Building societies, however, are not commercial businesses, they are ‘mutual institutions’ – owned by, and working for, their customers.

As a result, building societies’ interest rates generally tend to be a lot higher than banks as they are not required to pay dividends to any shareholders. In fact, upon learning of this community-focused and member-ownership aspect, over a quarter (27%) of the millennials surveyed noted this as a real advantage.

Whilst building societies do focus more on financial products like savings and mortgages, they are still able to offer the same services that banks provide, such as current accounts, for example. However, with the exception of Nationwide, building societies’ services are only available on a regional basis, which is clearly a factor that significantly influences a generation always on the move.

Nevertheless, for those millennials who are settled in one place and like the community focus that building societies offer, there should be every reason for building societies to be considered as an alternative to banks. And really, like most things in life, the choice should be focused on which provider is giving the best customer experience – not on whether the provider is a bank or building society.

Understanding Millennials

Clearly, more needs to be done to educate millennials on building societies, and part of this responsibility should fall on the sector itself. To effectively engage a demographic that has grown up in the digital age, surrounded by technology and the internet, more needs to be done to move away from the traditional model. It should be a priority for building societies to better meet these expectations by providing more engaging digital tools, improving both their internet and mobile offerings. The building society should no longer be seen as a forgotten institution, but one that is considered alongside banks – and that can offer financial products just the same as its business-minded brother.

Millennial leaders are set to shake up traditional company management as they focus on building businesses based on both profit and purpose, new research from American Express has revealed.

Redefining the C-Suite: Business the Millennial Way, surveyed over 2,300 global leaders and Millennial managers - the future leaders of business - to better understand how businesses will change as Millennials rise to senior management roles. The findings also provide an insight into how business leaders today can set their companies up for success in the future.

The research found that while over half (56%) of Millennials surveyed in the UK said that a C-Suite role is attractive to them, and that they are more likely than their Gen X counterparts to want a job that gives them status, Millennials also indicated that they want to shake up traditional business leadership.

75% of Millennials think that successful businesses of the future will see management look beyond the usual models of doing business and be more open to collaborating with new partners. Millennial professionals also think that teamwork is a more important quality in leaders than Gen X-ers, suggesting that the C-Suite of the future will promote a much flatter structure in the organisations they lead. Millennials also ranked passion as an important quality in leaders (30%) much more highly than their Gen X counterparts (19%).

As part of their C-Suite shake up, Millennial leaders will put employee wellbeing at the top of their agenda. When asked what the biggest challenges are to businesses of the future, Millennials’ top answer was paying employees fairly (49%), followed by retention of talent (40%). 74% of Millennials also say that successful businesses of the future will need to support employees outside of work, compared to just 67% of Gen X-ers.

The research also found that while the majority (76%) of future Millennial leaders think that businesses of the future will need to have a genuine purpose that resonates with people, they also recognise the importance of driving a profit – something often perceived as being at odds with doing purposeful business.

According to the research, 63% of Millennials say that it is important for them to be known for making a valuable difference in the world, and Millennials are more likely to invest in CSR when running their own businesses (58%) compared to their Gen X counterparts (50%).

At the same time, UK Millennials were found to have a keen eye on maximising shareholder profit, with 53% of Millennials saying that shareholder profit will be important for the success of businesses in the future compared to 46% of Gen X-ers. To achieve success in the future, 71% of Millennials also think that businesses will need to manage costs tightly, and 77% say that financial transparency will be important.

Commenting on the findings, Jose Carvalho, Senior VP and General Manager at American Express Global Commercial Payments Europe said, ‘Millennials are demanding more from the businesses they work for – and will come to lead. This is setting the stage for an evolution of the C-Suite, where they will seek to put both profit and purpose at the heart of their businesses whilst also structuring them in a way to ensure tight cost management and efficient processes.

Jose continued, ‘This offers valuable insight for today’s business leaders as they seek to future proof their organisations and prepare for Millennial leadership. At American Express, we are dedicated to providing payment products and services that are designed to help companies effectively evolve and navigate change to ensure they continue to get business done now and in the future.’

(Source: American Express)

From Baby Boomers, to Millennials, to Generation Z – as a society we’ve become all too accustomed with categorising people based on the year they’re born in. For banks in particular, it’s long been tradition to segment by age and build campaigns that target customers accordingly. Here Karen Wheeler, Country Manager and Vice-President at Affinion UK, explains to Finance Monthly why banks shouldn’t follow this tradition.

But, have they become too hung up on age groups? We’re now in an era in which we’ve never had more access to rich customer data, which should – in theory – mean that banks can better understand their customers’ behaviour, preferences and expectations. However, according to research by Vanson Bourne and Sitecore, 64% of UK consumers still feel like brands make assumptions about them based on single interactions alone.

Consumers are now easily frustrated by a business that doesn’t seem to understand them. So, what can banks do to prove they have a deep understanding of what their customers really want?

It’s time that banks shifted their thinking and took a smarter approach to segmentation. Basic grouping by age or gender is no longer accurate enough and developing a “segment of one” is key. Here’s three reasons why banks need to look beyond basic segmentation to build better relationships with customers.

1. Broad brushing generations can back-fire

There used to be a predictable life pattern, but now you can get married, have a baby, buy your first house or travel the world at almost any age. The lines are blurring, and things are becoming more fluid. It’s now recognised that just because two people are born in the same age bracket, it doesn’t mean they share the same experiences, needs, attitudes and desires in life.

For example, a 31 year old woman who is married and living in the country with school age children, has very different needs to a single, 31 year old women with a flat share in London. At best, irrelevant offers based on outdated life patterns can be a mild nuisance to customers, but at worst, making assumptions risks causing offence and can backfire on the brand.

Air France recently faced backlash after announcing that it will be launching ‘Joon’, an airline for millennials. Passengers of the airline will be served by cabin crew wearing “basic chic” uniform including white trainers, blazers and ankle-length trousers. Experts have excused the airline of stereotyping millennials and for assuming that every consumer born between the years 1981 and 2000 act and think the same.

2. Personalised offers have more impact

In the past, life stages were more fixed by age, but as society changes and with so much data now available, banks have the ability to build a much more holistic view of their customers which can enable personalised, relevant interactions – giving people what they like most, at the right moment in their lives.

A good example of a bank that’s already doing this well is Barclays. Its “Life moments” strategy is built upon carefully targeting customers with appropriate financial products and services as they approach new life stages, such as having a baby or buying a car – regardless of their age. More recently, Barclays announced it will offer recent graduate job interviewees free overnight accommodation in London, Birmingham and Manchester, after its research found that more than half of graduates surveyed said they had not applied for a job because of the amount it would cost to travel to the interview. By targeting this life specific stage, it positions them as a bank that not only has the best interests of graduates at heart, but a source of help during a time of need.

3. PSD2 is coming

2018 is set to be a game-changing year for banks. As the PSD2 (Revised Payment Service Directive) becomes implemented across the EU, banks’ monopoly on their customer’s transaction data and payment services is about to disappear. The new EU directive opens the door to almost any company interested in eating a bank’s lunch.

Before it’s implemented, there’s an opportunity for banks to use their ‘first mover advantage’. They shouldn’t wait for fintechs, AISPs or PISPs to encroach on their customer relationships, instead they should look at their own platforms and how they interact with their customers. Investing in tactics like better segmentation could improve and consolidate relationships at a time when it’s never been more important.

Many loyalty programmes haven’t worked for banks in the past. But is this simply because they’ve taken an outdated approach to UK consumers and not been personalised enough? Next generation customer engagement is all about tackling this with personalised content and interactions across more levels than ever previously possible. It’s about understanding the intangibles of human motivation to create more rewarding journeys, recognising the value of different rewards to different people and utilising new ways of collecting, storing and making sense of the data that’s generated.

If banks are to become truly valued in their customers’ lives, demonstrating an understanding of their priorities and anticipating their needs is key.

The time of true financial freedom has likely already arrived for those born on or before 1st September 1953 (Baby Boomers), but the future is not looking so bright for the Millennial generation (born between the early 80s up to 00s), who will face a more expensive and far longer financial struggle – according to a new study.

The study, which was carried out by retirement finance specialists Age Partnership, set out to find the true age of ‘financial freedom’ for the Millennial generation – with some interesting stats uncovered along the way.

Millennials (otherwise known as Generation Y) who began work at 21 and spend their younger years saving for a deposit, do not take out a mortgage until they reach an average age of 30. And to make matters worse, once they have a mortgage they will then spend 50% of their entire monthly income on bills!

Taking a look at earnings, the average wage for a Baby Boomer started at £10,140.96 in their first job aged 19, and were given an average 1.9% pay increase year on year, resulting in average lifetime earnings of £599,429.42.

This is comparable to today's Millennials, who have experienced a starting wage of £13,533.12 on average at the age of 21, with yearly pay increases of 3.7%, earning them up to £1,803,718.11 in their working lives.

Those born between 1940 and 1964 usually took out their first mortgage at the age of 22, with houses at the time costing around £4,975 at the start of the 1970s.  According to the study, mortgages taken out by Baby Boomers typically took 33 years to pay off.

This is a huge difference to Generation Y, who battle housing costs of upwards of £220,000 on average, and who do not take out a mortgage until the age of 30. It may sound like the Baby Boomer generation had it easy when buying a home, but they were faced with fluctuating high mortgage interest rates of up to 16%, whilst Millennials are currently enjoying lows of around 4%.

Research also showed the average age of a first-time mum in 1980 was 23.5 years old, compared to Millennials who are waiting until they reach on average 28.6. The cost of raising a child who reached adulthood in 2003 was £140,398, whilst the starting costs for Millennials having children in 2013 begins at £222,458 taking into account factors such as childcare, holidays, hobbies and food, and we are yet to see how the economy will shape the true amount spent once these children reach age 21 in 2034.

By the time parents reached 51 and a half, most Baby Boomers offspring had moved out and become financially independent. This compares to the age of 58.6 for Millennials parents, as it is predicted that their children will be living at home until the age of 30 (at least), further increasing the cost of having children for Millennials, from an already hefty 25.2% of lifetime income.

Age Partnership's study revealed that the general age of retirement for Baby Boomers was 59.6 years old, but unfortunately Millennials won't be retiring until the age of 68. Not only that, but Generation Y also incur an additional cost of travelling for work, which can add up to a grand total of £90,826 over their entire working life.

All of this combined means that the Millennial generation will have paid off their mortgage, finished shelling out for their children, and finally retired, just one week before they reach the ripe old age of 70 – if they're lucky! Meaning 70 is the age of financial freedom for the Millennials.

Tim Loy, chief executive at Age Partnership, commented: "Retirement can be an opportunity to live the way you have dreamed about all your working life, whether that be taking up an interesting hobby, or travelling the world. Juggling finances as we come across necessary obstacles in our lives can be challenging, which is why it’s important for people to have access to information which will help them to make informed decisions about their future.

"Having a good idea of when you will be financially free can help you to enjoy your retirement to the fullest, getting the best quality from life, which is exactly what we aim for when helping our customers."

(Source: Age Partnership)

Mortgage debt increased by 11%¹ to $201,000 last year and more than half (52%) of Canadian mortgage holders lack the financial flexibility to quickly adjust to unexpected costs, per a new Manulife Bank of Canada survey. This despite 78% of Canadians having made debt freedom a top priority.

The problem is most acute among Millennials, who saw their mortgage debt rise more than any other generation. Millennials are also most likely to have difficulty making a mortgage payment in the event of an emergency or if the primary earner in the household were to become unemployed.

"The truth about debt in Canada is that many homeowners are not prepared to adjust to rising interest rates, unforeseen expenses or interruption in their income," says Rick Lunny, President and Chief Executive Office, Manulife Bank of Canada. "However, building flexibility into how they structure their debt can help ease the burden."

Overall, nearly one quarter (24%) of Canadian homeowners reported they have been caught short in paying bills in the last 12 months. The survey also revealed that 70% of mortgage holders are not able to manage a ten% increase in their payments. Half (51%) have $5,000 or less set aside to deal with a financial emergency while one fifth have nothing.

¹ The percentage change in average mortgage debt controlled for regional, age and income differences between the samples. However, different research providers were used for each wave of the study which may impact trended results.

Millennials not alone

Despite generally having more equity in their homes, many Baby Boomers face the same challenges as Millennial homeowners. Some 41% of Baby Boomers said that home equity accounted for more than 60% of their household wealth and for one in five (21%) it makes up more than 80%.

This indicates Boomers may need to rely on the sale of their primary residence to fund retirement, since much of their household wealth is wrapped up in home equity. However, more than three quarters (77%) of Baby Boomer respondents want to remain in their current homes when they retire.

"Many Boomers approaching retirement share the same lack of financial flexibility as Millennials," said Lunny. "They want to remain in their current homes, but their home makes up a big part of their net worth. Instead of downsizing, or even selling and renting, homeowners in this situation could consider using a flexible mortgage to access their home equity to supplement their retirement income."

Helped into the housing market

Almost half (45%) of Millennial homeowners reported that they received a financial gift or loan from their family when purchasing their first home. By comparison, just 37% of Generation X and 31% of Baby Boomers received help from family members when they purchased their first home. Conversely,  almost two in five (39%) Boomers, many of whom are the parents of Millennials, still have mortgage debt.

The generational increase in new homeowners requiring family support comes despite a long-term trend toward two-income households. The number of Canadian families with two employed parents has doubled in the last 40 years, but housing costs are growing faster than incomes².

"With higher home prices and larger mortgages, it's more important than ever to find the mortgage that's right for you," says Lunny.  "A flexible mortgage that offers the ability to change or skip payments, or even withdraw money if your circumstances change, can help you ride out financial difficulties more easily."

Manulife Bank recommends that Canadians have access to enough money to cover three to six months of expenses.

² Statistics Canada. May 30^th 2016

Quebec homeowners most at risk

In addition, the Manulife Bank survey found that:

• Mortgage holders in Quebec (76%) would have the most difficulty with an increase of 10% to their mortgage payment and are more likely to be impacted should they have a fiscal emergency, as almost 30% have no emergency funds.
• British Columbia had the highest instance of homeowners getting help from family members when they purchased their first home, with almost half (45%) saying they either borrowed or were given money.
• Compared with other regions, homeowners in Manitoba and Saskatchewan (73%) prefer most to own and live in their current home when they retire.

Debt management should begin at an early age

More than two in five (44%) learned "a little" or nothing about debt management from their parents—and were also most likely to have been caught short financially in the past 12 months (28%).

"Kids who learn about money and debt management are more likely to become financially healthy adults," says Lunny. "One of the best lessons we can teach our children is the importance of saving for a rainy day. Being prepared for unexpected expenses is good for our financial health, good for our mental health and gives us the freedom and confidence to deal with the unexpected expenses and opportunities that come our way."

(Source: Manulife Bank)

According to L&G research, the ‘Bank of Mum & Dad’ is the 10^th biggest mortgage lender in the UK as buyers, and many fi5rts timers, rely heavily on their parents for support.

In the UK, the average mortgage deposit is around £26,000, the average age to lend is around 30, and the average borrowed money is at £132,100.

Finance Monthly set out to hear from a number of experts in the property, legal and banking fields, and heard Your Thoughts on the Bank of Mum & Dad.

Luke Somerset, Business Development Director, Contractor Mortgages Made Easy:

Generation Z is about to start working. Born just before the Millenium they are too young to remember 9/11 but have grown up in a world filled with political and financial turmoil. They are keen to look after their money and make the world a better place. Along with Generation Y these young people have an entrepreneurial spirit like no other generation before them and many of them are either shunning university to set up their own businesses or are going freelance when they graduate. Generation Y and Z are now joining the 2 million freelancers already working in the UK and we have already seen a 26% increase in the number of professionals aged 16-29 registering as self-employed over the last eight years. But these young people might think that they can never get on the property ladder and are destined to be forever known as ‘generation rent’.

However, the Bank of Mum and Dad might be an alternative option or even saving for a deposit. Let’s face it, saving a deposit is the single biggest hurdle between you and owning your own home. It’s not easy to save a substantial deposit when you’re establishing yourself, but thankfully help is at hand in the form of specialist savings accounts such as the Help to Buy ISA which will assist you in saving the 5% deposit you need to purchase your first home. And things have got better for the Bank of Mum and Dad too! Traditionally if your parents wanted to help you to get onto the property ladder, they would have had to write you a cheque and accept that they’d probably never see that money again.

But today there are a range of innovative products which allow your parents to lend you the money you need to buy your first home whilst ensuring that they’ll see their hard-earned savings back from the bank after an agreed period of time.

Mark Homer, Founding Partner, Progressive Property:

As government regulations controlling the type of borrowers which banks can lend to, and the size of the loan as a % of their income bites, many now find the simplest route is to take some of the cash/equity which the older generation sit on in their homes and pass it down to allow those onto the first rung of the ladder.

With the pendulum having swung far in favour of increased bank controls, many believe it has moved too far post the 2008 banking crisis as often happens immediately following periods of crisis. Indeed, there does seem to be a growing consensus that perhaps things could be loosened a little which would allow banks to lend more than 15% of their mortgage book at over 4.5 times income.

As buy to let lending reduces due to stamp duty, tightening lender criteria and the reduction of interest relief bite younger, purchasers are spotting the opportunity to marry family cash with some very cheap bank finance. Often able to secure mortgages at sub 2.5%, many residential purchasers are finding a purchase much cheaper in the long run versus renting.

Jonathan Daines, lettingaproperty.com:

We monitor both the housing and rental market closely and have watched the rise of Bank of Mum and Dad (bomad) steadily grow to where it is today – the ninth largest lender, which is set to fork out £6.5bn this year compared to £5bn in 2016.

But for those who aren’t able to tap into or even unlock the funds of bomad, renting remains the only affordable option which offers flexibility and the chance for tenants to move on as personal circumstances change.

A Which? survey has revealed that 49% of 18 to 34-year-olds regard buying a home as a greater concern than social care costs or energy prices, with some admitting to never wanting to have to tap into parental funds in order to own their own home.

Indeed, as a nation we have always strived to become home-owners, but with prices so high and the demand supply-ratio so out of balance, we have certainly noticed that generation rent is here to stay, with longer-term tenancy agreements more popular than ever in a bid to families in particular feel home from home within their rental property.

Gary Davison, Managing Director, QualitySolicitors Davisons:

As a property lawyer and also a deep-pocketed generous co-director of my very own ‘Bank of Mum and Dad’ (5 to support; I deserve some sympathy, as well as a cold flannel on the forehead at times), I feel suitably qualified to give some guidance on the topic in relation to property matters.

We are Birmingham’s leading conveyancer for residential property purchases according to official Land Registry data, and a significant number of these transactions are on behalf of buyers looking to take their first step onto the property ladder. In recent years a number of our younger clients have taken advantage (quite literally) of the Bank of Mum and Dad in order to secure a larger deposit that grants access to more favourable mortgage rates and cheaper monthly repayments.

For those parents looking to contribute to the deposit, it’s important to be clear whether the contribution is intended as a gift or a loan.

For many parents, their contribution to the deposit is meant entirely as a gift with no intention to claim a stake in the property or recoup the money at a later date. If this is the case, all mortgage lenders will require a deed of gift document signed by the persons gifting the money which confirms that they understand they have no interest in the property and no right to get their money back directly from the property. Gifted deposits will be free from inheritance tax if the donor lives for seven years after the payment is made.

For those parents who intend the money as a loan, one possible option is to take out a joint mortgage with your child. This may help increase their chances of a successful mortgage application, though you may also have to pay Capital Gains Tax when you come to sell the property as it is not your primary residence and if your share is over the annual CGT allowance.

Another option is to create a second mortgage against the property. This would be repaid out of the sale proceeds. However, you would need to gain permission from the mortgage lender first, which may be problematic.

The third option is less formal – a Deed of Trust – which is not registered against the property but sets out the proportions in which the property is held. Many of our clients will be buying with a partner, and whilst parents would happily give money to their own child they may not wish their partner to also benefit in the event of a separation or dispute.

Ultimately, if parents are intending to make any contribution towards a deposit then it is important that they take legal advice to agree on the most suitable course of action.

Shelley Chesworth, Partner and head of the family team, SAS Daniels:

We are increasingly seeing Generation Y turn to their parents to help them get a foot on the property ladder. However, we’re also seeing more frequently, situations that arise as a result of both parties not considering the long-term ramifications of gifting a substantial sum of money. Many are entering into this financial arrangement without giving consideration to inheritance tax consequences or the potential liability for beneficiaries.

Navigating this complex minefield can be tricky. Cohabitees in particular, acting as either a gift provider or beneficiary, need to consider putting certain agreements in place to ensure their gift is protected. For example, a Transfer Deed can protect an investment by expressing particular shares in the property while a Declaration of Trust can be used to set out the parties’ intentions at the time of purchase, so a property can be held in joint names but the trust details how the proceeds should be divided in the event of separation. A Cohabitation Agreement should also be considered as it sets out exactly what was intended as a gift or deposit.

Married couples should also take action. Imagine being gifted a substantial sum by your parents to invest in your marital home, only for the marriage to break down. In this situation the matrimonial assets as a whole will be taken into account and generally divided equally. A Declaration of Trust can be used in this situation but it won’t override the court’s ability to divide the couple’s assets in line with Matrimonial Causes Act. In order to protect parental deposits we’re seeing more people entering into pre or post nuptial agreements – they are no longer just for the rich and famous.

Charles Fletcher, Head of Analysis, Cogress:

The bank of mum and dad is now the ninth biggest lender in the UK with nearly one-third of first-time buyers seeking financial support from their parents. As property prices across the country continue to rise and outpace growth in average earnings, there is little reason to believe this trend will slow down anytime soon.

This year, UK parents are estimated to collectively lend £6.5bn to their children to help them buy their first homes. The bank of mum and dad already provided the funds for almost 300,000 mortgages in 2016, which represented 26 per cent of all property transactions.

Unsurprisingly, the London property market has the highest level of support for first-time buyers from their parents. 40% of homeowners in the nation’s capital have relied on parental finance support to buy their property. With an average house price of £610,418, prospective buyers in London are likely to continue depending on the bank of mum and dad to secure property.

Like any form of loan, lending from the bank of mum and dad is not a risk-free option. Not only can parents go bust like a bank, familial loans can also cause tension in the relationship between the lender and their parents. Problems can often arise due to miscommunication between the two parties, regarding any potential “strings attached” to family financial support such as interest rates, confusion over whether the money is a gift or a loan, and parental concerns about their child’s partner benefitting from their mortgage contributions.

The nation’s rising dependence on the older generation to access the property market highlights not just the current inequities in the market, but also opportunities for developers to create more affordable housing that addresses the needs of today’s first-time buyers across the country

Amy Nettleton, Assistant Development Director of sales and marketing, Aster Group:

The UK’s reliance on the bank of Mum and Dad is borne out of a serious affordability crisis. It’s an unsustainable solution that heavily favours those with parents that can afford to gift or loan them money.

The biggest challenge facing first-time buyers is saving for a deposit. The average house price in the UK currently stands at £218,000^[1] and setting aside cash for a £20,000 deposit is proving difficult for the millions of people facing high costs in the private rented sector.

In the absence of a drop in overall values of homes, we need more attainable deposit sizes. The shared ownership tenure has been offering this for over 30 years, with smaller deposits allowing home owners to scale up their equity over time. With affordability affecting a growing cross-section of first time buyers, shared ownership will have to become increasingly mainstream.

At Aster we have pledged to increase the number of homes available under this tenure, but making shared ownership work is about more than just building houses - it needs backing from lenders. Although there has been some progress in recent months, we are still to see many of the big players commit to offering products for the tenure.

While pressure is on the bank of Mum and Dad, we need increased mortgage provision for shared ownership. But there also needs to be a step-change in the way it is viewed – not just as an affordable tenure, but as a viable solution to a problem that affects society as a whole.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

Home ownership ambitions of millennials in the UK are still very much alive, despite the challenges of assembling a deposit for a house, according to HSBC’s first Beyond the Bricks study.

The study of more than 10,000 people across nine countries found that three-quarters (74%) of UK millennials expect to be property owners within the next five years, however, this is significantly below the global average of 83%.

Slow salary growth and house price inflation mean the British millennial generation face significant challenges compared to its global counterparts when it comes to housing affordability. The average property price in the UK increased by 7.5% in 2016, with official wage growth figures showing just a 1.9% growth.

Global statistics – millennial home ownership:

* China survey sample includes 85% urban, 14% rural and 1% rural respondents

According to Tracie Pearce, HSBC UK’s Head of Mortgages: “This study challenges the myth that the home ownership dream is dead for millennials in the UK. With three in ten already owning their own home, the dream of home ownership for millennials is definitely alive and kicking. In the UK, they face a two-pronged problem of rising house prices and slow salary growth meaning the dream of home ownership is a challenge but not unachievable.”

Financial support from parents can make all the difference when saving for a home, and over a quarter (27%) of millennials who bought their own home turned to the ‘Bank of Mum and Dad’ as a source of funding.

Despite the challenges, many UK millennials are willing to consider making sacrifices to afford their own home.  Almost half (47%) of those intending to buy would consider spending less on leisure and going out, 33% would be prepared to buy smaller than their dream home.

The report also finds that many millennials need to consider their financials when it comes to planning for their home purchase. Of millennial non-owners intending to buy a home in the next two years, more than 1 in 3 (40%) have no overall budget in mind and a further 48% have only set an approximate budget.

Therefore it is not surprising that over half (57%) of millennials who bought a home in the last two years ended up overspending their budget.

*Average national deposit based on current industry figures

HSBC’s research identified four actions that millennials can take to help make their home ownership dream a reality:

1. Plan early and don’t underestimate the deposit

Start planning early to make home ownership a reality sooner. Include saving for the deposit, usually the first payment you will need to make. Find a competitive mortgage to help make borrowing the rest more affordable.

1. Budget beyond the purchase price

Think about the extra things that will make the house you buy the home you want to live in, and make sure to include them in your home purchase budget.

1. Consider what cut backs you can make

Consider cutting back on your day-to-day spending. Think outside the box about what could help you to buy a home, such as buying with a family member or friend.

1. Get a full view of your finances

Think of your mortgage as part of your long-term financial plan, not as a one-off transaction. Different types of home loan suit different needs and situations. Seek professional financial advice if you need help to make the right choice.

[1] International Monetary Fund: Global Housing Watch November 2016   

[2] Korn Ferry Hay Group: 2017 Salary Forecast

(Source: HSBC)