For many millennials, high costs and other financial burdens are putting homeownership out of their reach. But a new study shows that family and friends are often coming to the rescue -- sometimes to their detriment.
Twenty percent of homeowners in the United States say they have benefited from the financial assistance of family members or friends to help them purchase their current homes, according to a study by investment management firm Legal & General Group. However, the decision to help loved ones is not always a wise move. Approximately 15% of people who gave or lent money to help a loved one buy a house found that their standard of living declined as a result.
The study refers to family financial assistance as the Bank of Mom and Dad (BoMaD), and says that the BoMaD spent $47 billion in 2018 helping family members buy $317 billion worth of property. The average amount of money that was either lent or given was $39,000, and if the BoMaD was an actual bank, it would be the seventh largest mortgage lender in the United States.
Age may play a role in whether someone needs financial help from loved ones when buying a house. According to the study, 43% of homebuyers under 35 received help from the BoMaD while only 6% of those over 55 received help and an additional 12% expect to get help in the future.
To come up with the money to help, BoMaD lenders use a number of strategies, some of which could be harmful to their own financial futures.
- 15% take out a loan to help
- 8% use money from their 401(k) savings
- 6% downsize their homes
- 3% tap their retirement funds
One reason potential homebuyers have sought out help from family and friends is because homeownership is becoming increasingly unaffordable for first-time homebuyers, says Nigel Wilson, chief executive officer for Legal & General Group. The “BoMaD reflects a housing market where significant problems remain in matching the supply and demand of different types of housing, most notably starter homes and affordable housing,” he says. New thinking is needed to better meet the needs of millennials who are entering the housing market, Wilson adds.
Some millennials also think homeownership is too big of a challenge in the near future if they don’t get financial help. According to the study, 43% of those under 35 who are not homeowners don’t expect to become homeowners in the next five years, largely because they can’t afford to save for the down payment.
If you’re thinking about helping a family member buy a house, make sure the move won’t hamper your own retirement or keep you from achieving other financial goals. While you may have the best of intentions, you likely won’t be able to borrow money to fund your retirement. There are many programs that offer down payment and other financial assistance to first-time homebuyers. Those planning to buy a house should look for federal and state programs that can make homeownership more affordable even without the contributions of family members.