The pace of house price growth is prompting more parents or other family members to put their assets on the line by guaranteeing home loans taken out by first home buyers, new figures show.
National Australia Bank says the proportion of first home buyers signing up for loans with the bank who have the backing of a family member has lifted to 6.7 per cent from 4.8 per cent in 2010.
The practice allows first home buyers with relatively small deposits to secure a loan and is often also used to avoid the cost of mortgage insurance.
However, it comes with risks for the family member who agrees to be a guarantor, as it means their assets are, ultimately, on the line for the portion of the loan they have guaranteed.
NAB’s executive general manager for consumer lending, Angus Gilfillan, said rising house prices and fierce competition from investors had made this option more popular with first home buyer customers.
“It’s getting a lot tougher for first home buyers to enter the market. The rise in house prices has been pretty well-documented, particularly in Melbourne and Sydney, where prices have increased by circa 50 per cent since 2008,” he said.
“All of this means that first home buyers need a larger deposit and we’re seeing that first home buyers are, effectively, being crowded out of the market.”
Aside from having a family member guarantee the loan, he said other strategies being used by first home buyers included buying a property as an investor and renting it out for several years, and co-purchasing with family or friends.
The Australian Securities and Investments Commission’s MoneySmart website urges parents to “think very carefully” before agreeing to guarantee a child’s loan.
It says that before guaranteeing a loan, they should think about alternatives, such as contributing to a deposit so a guarantee is not needed.
“Consider how you will pay back the loan if your friend or family member can’t. Can you afford the repayments?” the website says.
In response to these risks, Mr Gilfillan said NAB’s family guarantee product allowed the family member to limit their exposure to a proportion of the loan, not the whole mortgage.
If the parents have put down cash to guarantee part of the loan, they also receive interest on this cash.
Frequently, he said family members’ exposure was under 20 per cent of the loan.
This is the point at which banks no longer require costly mortgage insurance, which protects lenders from default risks.
“The risk associated with providing a guarantee is something that we talk to guarantors about and suggest that they get external advice first,” Mr Gilfillan said.
He said the bank would also ensure there was “some sort of deposit” form the first home buyer, who would be assessed in line with normal credit procedures.
Sydney house prices jumped 13.9 er cent in the year to April and Melbourne prices were up 5.6 per cent, figures from CoreLogic RP Data show.