The 'Bank of Mum and Dad' has become a common home financing strategy for young Australians looking to break into a booming property market.
An analysis of Aussie First Home Buyer data over the past six years revealed an upward trend in the total number of guarantor loan settlements made over this period.
The data shows there was a 71% increase in the number of loan settlements from the 2015 financial year to the 2021 financial year, indicating a growing interest for guarantor loans over the past few years, which is likely driven by increasing property prices.
Dave Hyman, CEO of Lendi Group - parent company of Aussie - warns that parents lending to their children doesn't come without risk.
"If you are the Bank of Mum and Dad, you really should consider your circumstances carefully before you become a guarantor – if something unexpected takes place, then the onus will be on you to step up and take responsibility for the loan," Mr Hyman said.
"Our data shows an upward trend in guarantor loans over the past few years, its important to note that guarantor loans only make up 10% of home loans within the First Home Buyer market."
Recently, the 'Bank of Mum and Dad' became Australia's ninth biggest mortgage lender according to analysis by Digital Finance Analytics (DFA).
It's a tongue-in-cheek moniker describing adults buying property with their parents' help, and DFA's research found 60% of first time buyers are getting financial help from their parents.
Parental contributions averaged $92,000 in April 2021, and in the past financial year alone, guarantor loans increased by 21%.
With strong house price growth through the year, having a guarantor on a home loan can increase the borrowing power for first home buyers.
A guarantor home loan allows a close relative (typically a parent) to use the equity in their home as security for part or all of the buyer's deposit while promising to be responsible for the home loan's repayments should the borrower struggle.
It means the buyer can get away with having little to no deposit and avoid paying costly Lenders Mortgage Insurance (LMI).
Some lenders even allow guarantor home loans to borrow up to 110% of the home's value.
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