Last week, it was reported in the press that British parents will lend or give more than £6.5 billion this year to help their children buy their first home. This figure is up from £5 billion in 2016. And it seems that the phenomenon is here to stay. It already has its own acronym. BOMAD. The Bank of Mum and Dad.
According to Legal and General, BOMAD will shell out a similar amount to that lent by the UK’s ninth-biggest lender, the Yorkshire Building Society.
Banks are Missing Out
What are the banks doing about this sizeable market share going missing? There’s probably not a lot they can do just now, as they can’t compete with an interest-free parental leg up the property ladder. However, it did make me think that here’s an opportunity the banks can capitalise on when open banking comes into effect in January next year. At this point, regulations will require the banks to open up customer data to third parties in the form of secure APIs and allow consumers to shop around for financial services and bolt them together. The floodgates are going to open up and allow fintech companies like Castlight Financial to develop all sorts of innovative platforms and products that will allow banks and other financial organisations the flexibility to offer their customers new, creative products.
So what about a joint parent and child mortgage? Perhaps the parents start off paying the bulk of the mortgage with their offspring making a small contribution. Then over the years the child’s contribution could be phased upwards and the parents’ downwards until at some happy point for the parents, the mortgage payments would be switched over completely to the child.
The Opportunity is Coming
And the great thing about the open banking revolution is that the financial technology is certainly there if a bank decided to embrace an idea like this in the fast-approaching brave new world. Castlight already has a secure API in place and a number of global and UK banks, brokers and credit agencies are already using our Affordability Passport to offer their customers 10 minute mortgages. And of course, the Affordability Passport would be the key tool to make a parent and child mortgage work. Castlight could produce affordability passports for both parties at the same time, categorising the income and expenditure of both parents and children to demonstrate precisely what each could afford. The lender could also request an annual update of the passports in order to assess the appropriate phasing mechanism and to choose the optimum time to switch the payments away from the parents.
I’m excited about open banking. And I’m excited by the opportunities we have as a creative fintech company to work within this new environment, driving innovation and delivering new products and services that will help consumers manage their finances safely and sensibly.