FOOL'S EYE VIEW
Don't Hand Your Equity To Your Kids

By Jane Mack (TMFJane)
July 10, 2003

I almost spilled my cup of tea over my keyboard this morning when I read a newspaper report that the head of a building society had declared that parents have a duty to use the equity in their homes to finance their children's own climb onto the property ladder.

Eh?

Bob Jackson, chief executive of the Cambridge Building Society, was speaking to a group of business leaders - no doubt, many of them parents - when he made his comments. I should think some of them choked on their vol-au-vents when he said it. Obviously, parents want to help their children as much as they possibly can. It's understandable. But to what extent should they help their kids once they've grown up? And at what cost to themselves?

My first thought when I read the article was, "well, he would say that, wouldn't he?" As the boss of a building society whose primary purpose is lending money to homebuyers, where are his future customers going to come from if they're not, initially, first-time buyers?

It's a fact that the housing market has to be pumped up from below, so to speak. You need first-timers to buy the studios and one-bedroom flats from those who are moving up to the next rung of the property ladder. Just as couples with children aim to move to more spacious homes as their families grow.

It's also true that house prices have spiralled somewhat beyond the reach of first-time buyers, particularly in certain parts of the country. However, does that really mean that it's up to parents to remortgage their homes to enable their 25- or 30-year-old 'child' to buy a house or flat? Parents work, pay the mortgage and finance their children's education right through to the end of university. So is it really fair, or even sensible, to expect them to continue subsidising their children once they've fled the nest and have struck out on their own?

In my view, parents shouldn't feel guilty about what they've managed to achieve after decades of sacrifice. Frankly, they should keep as much of it as they can for themselves once their children have ventured out into the real world. After all, unless they're very lucky, they're not going to have too much of a pension to live on in view of recent catastrophes. I nearly used the word 'disappointments' but, in view of the crises affecting pensions, endowments and Equitable Life (not to mention the collapse of some large companies at home and abroad), I feel 'catastrophes' is entirely appropriate!

I know young adults are leaving university with huge amounts of debt at the moment, and I genuinely feel sorry for both them and their parents. After all, the grants and maintenance system isn't what it used to be. In my view, further education to improve career prospects is a right, and those of us who are now working owe it to later generations to provide them with the same rights that we enjoyed. Unfortunately, the government disagrees – or simply can't afford it.

However, if children rely so much on their family - to the extent that they expect mum and dad to finance their deposit on a home - how on earth are they going to become financially savvy in the long term? There will probably come a time when they have their own families to support. How will they cope if they've never learned the lessons themselves?

I'm sure the parents among you will have no objection to helping out your children, especially if you don't need all your money for yourselves when you're old and grey. Nevertheless, when it comes to letting your kids loose on the real world, at least get them to pay you back if you decide to help them buy a home. Even if it's an interest-free loan, they will learn that you're not going to pay for everything forever.

A while ago, my husband and I started paying into an index tracker for our two baby nieces (we don't have kids ourselves). It should give them enough money to see them through university or help them out afterwards, should they need it. Saving for them throughout their childhood should help solve some of the financial problems that they'll meet as adults. But when they are grown-up and earning... well, that'll be another matter. They can have whatever's left when we die, but only when we die. Until then, it doesn't make sense to jeopardise our own retirement - just in case one of us happens to live until 103 and needs the money.

I appreciate that not having children of my own may colour my view a bit. But my nieces are my surrogate children and are extremely important to me, so I don't think I'm being terribly careless about their future financial well-being. It's just that I think we shouldn't try to help them too much.

Find out more about Helping Your Children Buy a Home and Investing for Children