A report from the Institute of Fiscal Studies (IFS) looking into the role of intergenerational money transfers, homeownership and wealth inequalities found 80 per cent of financial help for first-time buyers came from parents, while seven per cent was from grandparents.
Overall, a quarter of people getting onto the property ladder had financial help.
The first-time buyers received £25,000 on average and had deposits of £55,000. The IFS said this support had “potentially very high effective returns in recent years” because it helped to bring down the interest rate on the mortgage with a lower loan to value (LTV).
It said an additional £25,000 being used to raise a deposit of 25 per cent instead of 10 per cent would have reduced the repayments on a five-year fix taken out in 2018 by £8,500. The IFS said this was compared to a return of £850 if the money had been put into a cash ISA. It said over the period observed this was also shown to be better than investing in the stock market.
The report said this could have an effect on wealth accumulation.
The IFS also found that receiving financial help was not necessarily responsible for homeownership gaps as some people were already able to afford the house they bought or a cheaper property. The support allowed buyers to put down a larger deposit, buy a more expensive home, or be less “aggressive” with saving.
Overall, people tended to use the money received to put down a larger deposit.
Impact on affordability for first-time buyers
Some 34 per cent of first-time buyers in their 30s who got help could already afford the house they went on to buy, compared with 14 per cent in their 20s. People in their 30s were found to be less likely to receive support and it typically was not the reason they were able to purchase a home.
The data showed that 46 per cent of first-time buyers in their 20s were not able to afford their home without financial aid.
For two-thirds of those unable to buy a home without help due to the deposit, every £1,000 they received increased the value of the property they could purchase by £10,000.
The parental effect
People whose parents are university-educated and homeowners themselves were more likely to get support, accounting for nearly half of first-time buyers in this cohort. They received £35,000 on average.
Among people whose parents are renters, 29 per cent received financial assistance to buy their first home with an average of £11,000.
It said homeownership rates had “declined dramatically in decades” and this was more prevalent in high prices areas as well as among people whose parents were not homeowners.
Between 2009 and 2019, the homeownership rate among people aged between 25 and 39 fell from 55 per cent to 43 per cent.
The children of homeowners are more than twice as likely to be homeowners than the children of renters. The homeownership rate for the children of homeowners was 51 per cent in 2019, compared to 60 per cent a decade earlier. Meanwhile, the homeownership rate for the children of renters fell from 40 per cent to 22 per cent over the same period.
The IFS suggested that when it came to support from the government through initiatives, such as the mortgage guarantee scheme, renters would already need to be close to affording a home.
For people with lower earnings, a scheme which allows for a smaller deposit is less impactful as the buyer is still constrained by maximum income multiples. However, the IFS found this was more beneficial for those with less savings.
Some 18 per cent of renters aged between 25 and 39 do not have enough of a deposit to buy a home, and this rises to more than a quarter among renters in their late 30s.