Guarantor loans jump 71 per cent across Australia in six years: Aussie Home Loans

Guarantor loans have increased by 71 per cent over six years, new figures reveal, as runaway house price growth prompts more parents to help their children get onto the property ladder.

The bank of mum and dad has become prolific in Australia, bankrolling about $35 billion worth of loans and is now the ninth biggest lender in the country.

While many opt to gift large sums of cash, parents can alternatively act as guarantors by using the equity in their own home as security when their children do not have enough money saved up for the deposit.

The jump in guarantor loans occurred from the financial year 2014-15 to the financial year 2020-21, a new analysis of Aussie Home Loans data shows.

While there was an eight per cent drop between the financial year 2018-19 and the financial year 2019-20, likely due to the pandemic, there was a quick 21 per cent increase in guarantor loans again between financial years 2019-20 and 2020-21.

The rise in this type of help from parents was driven by steep house price growth in recent years, especially since the pandemic-led boom took off, said David Hyman, chief executive of Lendi Group, the parent company of Aussie Home Loans.

“The rate of guarantor involvement has increased reasonably steeply,” Mr Hyman said.

With the median house price edging closer to a million dollars in many cities, and well exceeding this milestone in Sydney, this trend has only accelerated, he said.

“The outcome for all of that, in particular for first-home buyers and upgraders, is that it’s harder to get into property. It’s a reasonably low friction way for those buyers to get into property,” he said, adding that potential macro-prudential tightening – or how easy it is to get a home loan – would not solve the affordability issue.

“We will continue to see guarantors have a place in the market. You just need to understand it might take a little longer to release the guarantor or the pledge [if property price growth slows],” he said.

The rise of guarantor loans, something unheard of two decades ago, was a symptom of Australia’s fast deteriorating housing affordability, said Shane Oliver, AMP Capital’s chief economist.

“Twenty years ago there wasn’t even any talk about the bank of mum and dad, so I think it’s reflective of the problems young people have in getting into the housing market given the deterioration of affordability,” Dr Oliver said.

“To get into the property market in the first place you need to borrow large sums and you need a large dollar amount for the deposit, which also requires help.”

With first-home buyers taking up to seven years and one month to save up for an entry-level house in some parts of Australia, the time to put together a deposit was only likely to blow out as prices continue to rise, Dr Oliver said.

“As house prices have become less and less affordable, people have found ways to make it possible. It’s baked into the system,” he said.

“What’s happened is people have found ways to live with poor affordability and maybe that just perpetuates it and government policy has partly gone down that path as well.”

The prevalence of guarantor loans was undoubtedly increasing as it was the “next best option” after cash gifts, according to Will Unkles, 40Forty director and mortgage broker.

“Gifting funds is very simple and easy because it doesn’t tie up the family home but not everyone is [able to], so the next best option is going guarantor on the loan,” Mr Unkles said.

He cautioned that there are risks involved with guarantor loans if the property does not grow in value and the buyer is unable to maintain loan repayments.

“At that point, the bank has a hold over the parents’ property and can call upon that should you not be able to repay your loan,” he said. “In a flying market, nobody cares about that but there will be a moment where property doesn’t grow at the rate it is at the moment.”