Credit crunch forces baby bonds into limelight

Uncertainty in the mortgage market has highlighted the potential benefit of opening a child trust fund, or 'baby bond', according to Moneyfacts.

The financial website says recent events have shown that in order to get the cheapest mortgage deal a decent-sized deposit is essential, pointing out child trust funds could provide the answer.

The UK Government introduced the products three years ago with the aim of ensuring every child has savings at the age of 18.

Eligible children received an initial subscription from the government in the form of a voucher for at least £250, and the Government says the funds help children get into the habit of saving.

Michelle Slade, an analyst at Moneyfacts, says: “The ‘bank of mum and dad’ has become a well known phrase over recent years as many children rely more and more on their parents to help them get on the property ladder.

"Recent events have shown that in order to get the cheapest mortgage deal you need to have a decent sized deposit. Is there a better gift to give your child at 18 than a nest egg to help them buy their first home?”

There are two types of child trust funds on the market. The first, a cash-based savings account, would have acquired £497 in interest had a parent invested the £250 plus the £1,200 each year since the products were launched in 2005.

The second child trust fund invests in a selected investment fund, either a stakeholder fund, where the maximum management charge is no more than 1.5%, or non-stakeholder where the charge can be more than 1.5%.

Slade says: “Last year the performance of these stakeholder funds was negative but this is a result of the poor performing stock market and the ongoing credit crunch.

“Child trust funds are long term investments and investment versions are expected to outperform savings versions in the long run.”

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