The Bank of Mum and Dad is potentially the UK’s most lenient lender and its relaxed approach means it ends up writing off huge numbers of loans each year, according to research from Prudential.
Remarkably, every one of the more than 1,000 parents interviewed on behalf of Prudential said they had already loaned money to their children or grandchildren to cover major financial commitments, or hoped to do so in the future. But there is a risk that their generosity will come at a cost to their own financial futures – one in five (19%) said they had taken money out of their pension fund or sacrificed saving into their pension to help their children.
Others have had to cut back themselves as a result, with one in five (19%) saying they’ve had to go without certain things, while one in ten admit they have ended up being short of money for emergencies since giving the loan to a family member.
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However, despite the potential costs to their own finances, nearly six out of 10 (59%) of those who have lent money to their offspring have subsequently decided to write off some or all of the debt – with a generous one in three (34 per cent) having written off the whole lot.
Part of the reason could be that more often than not, applying for a loan at the Bank of Mum and Dad doesn’t involve any onerous terms and conditions – 75% per cent of parents who have loaned money did not impose any conditions or specific repayment terms on their loans, despite the fact that more than three quarters (77%) of them initially expected to be repaid in full.
Just one in seven (14%) lent the money with an agreement of fixed monthly repayments and only eight per cent put a written repayment agreement in place. However, one in 14 creditor parents (7%) take a tough line and have a written agreement in place specifying exactly what the loaned money should be spent on.
In another sign that the Bank of Mum and Dad is happy to write risky loans to their families, many parents admit to lending money their children can’t repay. Of those who have written off some or all of their loans, two in five (41%) did so because their child simply couldn’t afford to pay them back, while one in seven (15%) said their child never had any intention of repaying them at all.
Kirsty Anderson, a retirement income expert at Prudential, said: “I’m sure every parent would love to be in a position to help their families when they’re faced with significant financial challenges and our research shows that many are doing just that.
“Whether it’s helping with a deposit to buy or rent a house, or clearing student debt, the Bank of Mum and Dad plays a vital role in the finances of younger people. However, it is important that parents remember to consider their own futures when deciding on making loans to their families – for example, money taken now from savings and investments intended to provide for retirement could make a real dent in your income when the time comes to give up work, especially if you eventually have to write off all or some of the loan.
“But of course, family life is not always straightforward and many parents who are considering dipping into their pension savings or stopping saving altogether could benefit from a consultation with a professional financial adviser before making any decisions. Pension saving is for the long term and for most people is most effective when they save as much as possible for as long as possible during their working lives.”