Mom and Dad

The Bank of Mom and Dad (BoMaD) isn’t new as kids have been borrowing or receiving gifts from parents for years. But a new study by Legal & General, a U.K.-based financial services firm and global investor with $1.27 trillion in assets, has found a new twist, one that “hurts” parental retirement savings.

The L&G study found that one in five U.S. homeowners received gifts or loans from family to help them buy their home “supporting the purchase of $317 billion worth of property across America in 2018.” The study states that if BoMaD were a real lender, it would be the seventh largest in the United States. In fact, the total amount loaned out by BoMaD is estimated to be  $47.3 billion, just less then fifth-ranked U.S. Bancorp.

The average sum given as a gift or interest-free loan is $39,000 per loan. Parents are “giving until it hurts — putting off retirement or accepting a lower standard of living in their golden years to help the next generation,” the study finds. This amount doesn’t include other loans or gifts, usually dealing with college. Those loans averaged roughly $41,500.

Other findings:

  • 54% of U.S. parents and grandparents drained cash savings to help younger family members to purchase property;
  • 7% of BoMaDs postponed retirement, 15% reported a lower standard of living, 14% felt less financially secure;
  • 48% made gifts or loans without getting professional advice.

The online survey of 2,177 U.S. respondents was done by YouGov and Censuswide from Sept. 26 through Oct. 4, 2018. For borrowers, the total sample size was 1,159 adults.

Reversal of Fortunes

The study also states that “the generosity of these families has probably not reached its limits. … Few so far have used reverse mortgages to release the equity in their own homes, just 2% of the over 55s [years of age]. That’s a market that is likely to see growth in the future and could fund more purchases in years ahead.”

Bear in mind the baby boomer generation is “the wealthiest in history. By 2020, they are expected to account for just over half of all net household wealth in the U.S,” according to a Deloitte paper cited in the study, and will be passing on $30 trillion to their heirs.

Of course, many can’t or won’t help a child out, largely due to their own low income (35%) or the belief that the child should support themselves (29%).

L&G adds that a key part of the problem is the lack of inventory for affordable housing. It states that today’s median home cost is $310,000, while homeownership in the United States has fallen to 64.4% from 69%. Add to this the staggering amount of debt held by college graduates.

Further, many millennials have “effectively given up on owning their own home — at least in the near term. Of those under 35 who don’t already own, 43% say they don’t expect that to change in the next five years — most often (40%) because it’s not feasible to save for a down payment in that time frame.”

The report concludes that “greater use of reverse mortgages and the willingness of generous homeowners to make sacrifices for their loved ones means the Bank of Mom and Dad will remain open for business for a long time to come.”

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