Due to rising house prices in many parts of the country, more and more parents feel obligated to guarantee their children’s home loans to help them enter the property market.
The latest figures from National Australia Bank (NAB) and Westpac suggest that loans guaranteed by family members are growing more quickly than the broader market. And while parents are urged to be cautious when guaranteeing the debts of their children, it’s a market where banks are seeing significant potential. As a result, the industry has begun marketing products that limit the risks to parents if their children are unable to repay their loans.
According to NAB, 8% of its first-home buyers taking out new loans this year had the backing of a family member, up from 4.8% in 2010 and 6.7% in 2015.
Westpac reported similar growth. The country’s second largest lender said the number of customers using its guarantee product—provided via its St. George subsidiary—increased 9% in the past year. This is greater than the 8% home loan growth across the entire bank, suggesting strong demand for financial products that allow parents to help children onto the property ladder.
Rising median house prices in Sydney and Melbourne means borrowers who want to purchase homes in these high-growth markets often have to borrow more.
ABS figures show that the average loan size for a first-home buyer in NSW has risen 14% in the past two years to $376,000, though this figure is below last year’s peak. In Victoria, the average loan size for a first-home buyer has risen 10% to $325,000.
With parents acting as guarantors for their children, banks often approve loans that would otherwise have been declined as too risky. Being a guarantor, of course, is not without its risks, as in extreme cases, it could force parents to sell their homes.
Fortunately, banks have developed products that are designed to reduce the risk for guarantors. “If the parents have got equity in their home, they can use that equity to secure the deposit required for the children to buy their home, but are only exposed to the level of that deposit, not the whole value of the home,” George Frazis, chief executive of Consumer Bank, Westpac Group, said.
St. George has a product that limits the parents’ exposure to the size of the deposit, rather than the entire mortgage. Similarly, NAB’s guarantee product allows family members to put up the equity in their homes as security for first-home buyers. Alternatively, they could put the cash into a term deposit that will pay them interest.
Collections: Mortgage News
Share