The bank of Mum and Dad - a Case Study!
Buying a House: When I was young things were very different
My son is 25 and is in the process of buying a house. He needs my help.
When I was young things were very different. University education was free but only about 10% of young people bothered to progress onto higher education. The other 90% (the majority) left school aged 15 to 17 and got a job. Jobs for these young people were not well paid but they were an excellent education. Most of these young people learned to communicate and they learned to get themselves organised and make things happen.
For myself, I was rather daunted by the prospect of leaving school and getting a job, so I stayed in the education system and went on to university. In the mornings I got out of bed on time, went to all my lectures, worked diligently, passed all my exams, got my degree and then got a job just before my 21st birthday. For me university was a great time and as it was free I didn’t have to borrow any money.
My first job was working as an electronics engineer. I spent a few years in Portsmouth, then some time in Egypt and then a few years working in the desert in the Sultanate of Oman. For a young person I was quite well paid, so at the grand age of 23, I bought my first house (a one bedroomed flat in Bournemouth). It cost me £20,000 of which £5,000 was the deposit (money that I had saved) and £15,000 was a mortgage (the maximum that I could borrow). I didn’t get any help from my parents (they didn’t have any money!).
That was all back in the early 1980s. Moving forward, the year now being 2018, things are very different. Over the last 38 years all sorts of things have happened. Students now have large debts, interest rates on mortgages are very low, lots of people have become landlords and the prices of houses has gone up a lot.
Instead of being encouraged to leave school and get jobs, students are now encouraged to stay in the education system, even if there is no benefit to them. Most higher education institutions are now called universities. The student is the customer. Some of the people running the universities see themselves as highly skilled businesspeople and they have also convinced themselves that they should be paid high salaries. Students are now being sold a high cost package and they are being made to borrow vast sums of money to pay for it. Politicians and University Chancellors tell us this is great for society (I’m not so sure).
Interest rates in the 1980s were generally between 8% and 16% and went up and down regularly. This meant that borrowing money was expensive and so less money was available to buy houses and hence the price of houses was low. Over the next few decades the interest rates fell and since 2010 interest rates have been their lowest ever, varying between the incredibly low values of 0.25% and 0.50%. This has meant that borrowing money has been very cheap and there has been lots of money available to spend on houses. The price of houses has gone up.
Back in the 1980s it was difficult to be a landlord, as there were all sorts of draconian legislation that made it unprofitable. In the 1990s all the bad legislation was removed and everything then changed. Lots of people (often middle aged ma and pa investors with a bit of spare cash) found they could become landlords and make stacks of money by charging rent to people who could not afford to buy their own home. In fact the landlord business quickly became so profitable that landlords started buying up houses left right and centre, which then drove the price of houses sky high.
The average price of a house in the UK is now (2018) approximately £212,000. Back in 1980 it was about £23,000 (Nationwide figures). Inflation over this period adds up to approximately 482%. If house prices had only increased in line with inflation over this period, the average price of a house today would be approximately £111,000. These numbers are only very approximate but you can see quite clearly that houses now cost in real terms almost twice as much as they did in 1980.
So what does this mean for my 26 year old son today and what does it mean for me (his 59 year old father)? His situation is that he has a student debt of approx £35,000 and the government are now charging him interest at an outrageous rate of approx 6%. As it is, he counts himself lucky, as many students now have debts of over £50,000. He is presently living in his girlfriend’s mother’s house and they both pay a nominal rent.
In general, I think that young people should be told to stand on their own feet. Being poor is an excellent education in itself (I had plenty of experience when I was young). As a general rule, parents should not give their children money. After all, I did not get any help from my parents.
However, I did not have to pay anything for my education and the cost of my first house was half what it would otherwise be today. I still think young people should stand on their own two feet but I think there are two occasions when young people do need financial help from their parents. One is when they buy their first car and the other is when they buy their first house.
I bought my son a car a few years ago so that is now done (at the time I certainly did not want him to buy a motorbike). The next step is helping him to buy somewhere to live. I am not flushed with money, which as a parent probably makes me pretty much normal. I have a mortgage on which I am paying interest at 1.6%. So this year, when I was renewing my mortgage, I increased it by £20,000 and have now given this £20,000 to my son. He and his girlfriend have been very careful with their money and between them they have another £15,000 in savings making £35,000. This is just enough for a deposit. They are now negotiating to buy a house for £285,000 and will be taking out a mortgage for £255,000 (at 2.44%, plus an upfront fee of £900 to the bank and a fee of £500 to the mortgage broker). The house is in a fairly good state of repair and so they are hoping not to have any major expenditure over the next few years. For the first few years they are also hoping to take on a boarder to help make ends meet.
I am sure that not everyone will agree with my views but I hope you find the above interesting. One last point; I didn’t actually tell my son that I was giving him the money. I said to him that it was a loan and if in the future he becomes rich and I am poor, I would be very grateful if he pays it back to me.