More parents are guaranteeing their children's home loans to help them enter the property market, two major banks say, as rising prices prompt first home buyers to take on bigger debts.
In a phenomenon dubbed the "bank of mum and dad", fast-rising prices in Sydney and Melbourne especially are causing more first home buyers to depend on parental help through loan guarantees or cash transfers.
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The bank of mum and dad
Superannuation savings of older Australians are under stress as they help their children buy houses, says Treasury head John Fraser
Confirming anecdotal evidence, figures from National Australia Bank and Westpac suggest loans guaranteed by family members are growing more quickly than the broader market.
While parents are urged to be wary about guaranteeing the debts of their children, it is a market where banks see significant potential. The industry is marketing products that limit the risk to parents if their child is unable to repay their loan.
National Australia Bank told BusinessDay 8 per cent of first home buyers taking out new loans now had the backing of a family member, up from 4.8 per cent in 2010 and 6.7 per cent last year.
Westpac, the country's second-biggest lender, said the number of customers using a guarantee product provided through its St George brand had increased 9 per cent in the past year.
That is faster than 8 per cent home loan growth across the entire bank, suggesting strong demand for financial products that allow parents to give their children a leg-up.
These increases come as first home buyers, who typically have much less equity than other buyers, are responding to fast-rising prices in NSW and Victoria by borrowing more.
ABS figures show the average loan size for a first home buyer in NSW has risen 14 per cent in the past two years to $376,000, though the figure is below last year's peak. In Victoria the same figure has risen 10 per cent to $325,000.
Being a guarantor means parents agree to cover any shortfall in their children's loan payments. If parents make this promise, banks will often agree to a loan that would otherwise be declined as too risky.
The Australian Securities and Investments Commission's MoneySmart website advises people to "think very carefully" before becoming a guarantor, as in extreme cases it can force the parents to sell their house.
However, banks are keen to grow in this part of the market because of strong demand, and they have developed products designed to limit the risks for parents.
The head of Westpac's consumer bank, George Frazis, said saving a substantial deposit was the biggest barrier to first home buyers, and banks had a role to play in addressing this challenge.
Three decades ago an average first home buyer needed an average deposit of about twice their income, but in Sydney or Melbourne they may now need almost five times their pay, he said.
Westpac, through St George, has a product that limits the parents' exposure to the size of the deposit, rather than the entire mortgage.
"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," Mr Frazis said.
NAB's guarantee product allows family members to put up equity in their home as security for the first home buyer, or they can put cash into a term deposit that will pay them interest.
"We understand it can be difficult to enter the property market, and for some customers, a family guarantee provides them that little bit of extra support to enable them to buy their dream home," NAB's general manager of home lending Meg Bonighton said.
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