How the Bank of Mum and Dad could have bought you a house for less than the cost of a deposit today

The Guardian newspaper reported over the weekend about the ‘boomerang’ generation: millennials, who continue to live with their parents well into their 30s due to high house prices.

Whether those parents allow their children to live rent free or charge them £100 a month as the article suggests, the savings made by staying at home could also be the way most young people can actually accumulate enough money for that all-important deposit.

Even so, it can take years to save enough and not all parents (or grandparents) are that patient, which brings us to option two: a hefty gift or loan to cover the cost of a house deposit at a much earlier date.

Option number two comes with its own challenges; not only can accepting large gifts or loans from family cause tension in the relationship, it can, for some, mean that parents are withdrawing money from their own pensions or savings and maybe leaving themselves short.

So what if there was a third option?

I personally have five nieces and nephews and, as the number has grown over the years, the amount I spend on each child has naturally decreased. I can’t be shelling out hundreds of pounds for every birthday party and school fundraiser – not to mention Christmas!

What I wish I had done already, instead of spending money on new toys or fancy clothes, is invested it on their behalf so they could spend it more meaningfully themselves in the future.

This got me thinking, what would have happened if my parents had invested for me when I was a little girl – could I have owned my own house at 25? Turns out yes, I could.

‘Dear parents, I am fully aware that money doesn’t grow on trees. That’s why I’m asking you for it.’ – Anonymous

The benefit of hindsight

Let’s imagine my parents had invested £200 every month for the first 10 years of my life. They would have put away £24,000 in total – arguably the very amount I could potentially be asking for now at 25, newly married, and wanting to settle down in a house of my own.

Investing that £200 a month in EdenTree Amity UK (which has been managed by Sue Round since its launch in1988), would have yielded £25,693.92* by my tenth birthday. Had this amount been left to sit for a further 15 years (with no further contributions being made), I could have been enjoying a £100,282.91** birthday present on my 25th.

Not quite enough to buy a house outright, but enough to ensure a competitive lending rate and lower monthly mortgage repayments.

Three Elite Rated funds that could have bought you a house

What if that £25,693.92 from the initial 10-year investment had been reinvested in something more risky, but with the potential for higher returns?

There are 21 current Elite Rated fund managers who’ve been managing the same fund since my tenth birthday in July 2003. Of those 21 managers, three would have produced the £300,000 plus needed to purchase a house today.

Scottish Mortgage Investment Trust – £331,963**

Marlborough Special Situations – £315,295**

Jupiter European Opportunities – £308,738**

While not managed by the same manager of the past 15 years, the best performing Elite Rated fund over the time frame was Baillie Gifford Global Discovery, which would have turned my nest egg into £343,202** .

Raising your deposit without the Bank of Mum and Dad

Not all parents are in a position to save money for their children. So what about those who are trying to save for a deposit themselves, while also paying rent?

Investing for your first home can be a daunting task, but with various ISA products available, there’s no reason not to try.

One relatively new option is TM Home Investor. Launched in 2012, it is the only fund in the UK that invests solely in residential property. It could be relevant for investors saving for a deposit, whether first time buyers, or parents, grandparents and friends helping others get onto the property ladder as it invests in private rented sector housing across the UK and aims to capture UK house price growth and also provide an element of income return.

Read more about how to invest towards your first home using an ISA

*Source: FE Analytics, total returns in sterling, 1 July 1993 to 30 June 2003.
**Source: FE Analytics, £25,693.92 lump sum invested from 1 July 2003 to 30 June 2018, total returns in sterling.