Not so long ago, parents raised their children to adulthood with a reasonable expectation that adulthood meant independence in every sense of the word. Once the fledglings left the nest, they were only expected to come back on occasion for visits, hopefully with a nestling or two of their own in tow. But somewhere along the way that narrative became scrambled – something to do with a Great Recession, if we recall. Today more and more adult children are delaying moving out, or they are moving back home, and many who are still out “on their own” are looking to Mum and Dad for financial help. This can lead to some uncomfortable situations, emotionally as well as financially.
How far should parents go to bail their adult kids out of a financial crisis? The answer depends upon what the parents can afford, both financially and emotionally.
Helping loved ones can be risky business
It is both natural and admirable for a parents to want to see their children blossom into their own independent selves, and the desire to offer financial assistance in the children’s efforts in reaching that goal can be powerful indeed. Proof of that is found in the fact that the “bank of Mum & Dad” is actually one of the top ten mortgage lenders, having loaned out in excess of £5 billion in 2016 alone. And depending upon the size of the loan and the parents’ wealth level, the risks associated with such guarantor loans is compounded by factors that neither parent nor child is particularly likely to consider.
One aspect that too many parents (and grandparents) neglect to consider is the potential effects of the adult child’s relationships on his or her finances and, by extension, the parents’ finances as well. The contributions by a paramour or even a platonic roommate toward covering the monthly mortgage payments can be claimed as investments in the equity of the house unless both parties have agreed to a “deed of surrender,” by which the partner or roommate relinquishes all rights to claim ownership in the home. If the equity in the house is secured by the parents’ equity in their house, the situation can get messy and quite costly.
And mortgages aren’t the only area in which the fabled “Bank of Mum and Dad” is feeling the strain.
Independence just isn’t what it used to be
Global information services company and credit reporting agency Experian released a study in May 2016 revealing that over half of the parents surveyed reported that their children aged eighteen and over have taken money from them an average of four times since becoming “financially independent”. The total amount loaned (or donated, as the case may be) averaged over £6,000. Even worse, one-third of those doting mums and dads reported being under financial pressure as a result of helping their kids out. It would appear that a lack of basic money management skills is the core problem, even above the economic and social realities that have made it more of a challenge, compared to previous generations, for today’s young adults to achieve and maintain financial independence.
Sadly, many children get little or no instruction in good financial practices in the home or at schools, and the instruction many more receive is misguided and/or incomplete at best. As a result, parents are shouldering an increasingly heavy financial burden, with roughly one-eighth of them having to go further into debt themselves in order to help their children.
A possible middle ground
While the figures above are indeed a cause for concern, the fact remains that parents want the best for their children, and it can be enormously difficult to say no when a child is in trouble, no matter how old that child may be. What’s a mum or dad to do? Setting boundaries is essential, as difficult as it may seem. If you honestly can’t afford to lend or give your baby a down payment on a house, or it would ruin you to fork over thousands of pounds to pay off his or her credit card debt, you have to be upfront about it. If by helping out you are seriously endangering your own financial well being, don’t do it.
There is however a possible middle ground if your child is facing a true money crisis, needs cash for a necessary purchase or to get him or her out of a bind, and/or has a bad credit history. A guarantor loan, on which you agree to guarantee that the loan is repaid, but for which the child has primary responsibility for repayment, may be a reasonable solution. It still involves potential risk for you but it isn’t as risky as handing over cash you really can’t afford to spare. In addition, a guarantor loan would hopefully motivate the child to protect and build their own credit (and their relationship with you) by living up to the terms of the loan.
Once an agreement is reached as to the amount of the loan, shop around for the best deal. And last but far from being least, be sure that both your child as borrower and you as guarantor can afford the loan without imposing a hardship.
Before entering into any financial agreement, you and your child need to have an honest discussion to clarify everyone’s expectations, concerns, and risk. Handling the arrangement as you would handle any business agreement might seem rather cold, but doing so can prevent a lot of heartache and expense later.