Guarantor loans jump 71 per cent across Australia in six years

The popularity of guarantor home loans is on the rise with more parents wanting to help their children jump on the property ladder

23 December 2021|3 minute read

father and son at laptop finding guarantor loan

With the cash rate at an all-time low and widespread availability of government subsidies, many young Australians are looking to buy their first property.

This comes at a time when the property market is particularly challenging for younger people to break into due to surging property prices in parts of Australia.

However, the willingness of parents to support their children to fulfil this dream is playing a role in pushing this demand.

An analysis of Aussie First Home Buyer data over the past six years reveals an upward trend in the total number of guarantor loan settlements made over this period.

The latest Aussie data reveals that there was a 71 per cent increase in the number of guarantor loan settlements from the financial years 2015-20211.

This indicates a growing interest for guarantor loans over the past few years, as runaway house price growth prompts more parents to help their children get onto the property ladder.

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.

Why are people getting guarantor loans now?

The rise in guarantor home loans has largely been driven by steep house price growth in recent years, especially since the pandemic-led boom took off, said David Hyman, CEO of Lendi Group, the parent company of Aussie.

“It seems that the Bank of Mum and Dad has had a real boost as a result of the pandemic, with many first home buyers relying on the support of their parents and grandparents to take a step onto the property ladder. And in fact, according to research by Digital Finance Analytics, the Bank of Mum and Dad is now ranked as Australia’s 9th largest mortgage lender2,” Mr Hyman said.

“However, while our data shows an upward trend in guarantor loans over the past few years, it’s important to note that guarantor loans only make up 10 per cent of home loans within the First Home Buyer market3 and there are other avenues you can pursue to make the dream of purchasing your first home loan a reality,” he continued.

Further to this, anecdotal insights from Aussie brokers also reveal that many parents are supporting their children’s first property purchases through a cash gift to help them with the deposit, rather than going guarantor on the home loan.

The risks of guarantor loans

For parents that are able to help fulfil the milestone of helping their children purchase their first home, it can be a really fulfilling experience.

However, it’s important to remember that going guarantor for your kids is not without risk – and there are other options that can be pursued to help make these dreams a reality.

“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 added.

What is a guarantor loan?

A guarantor loan is one way for borrowers with a low deposit (or none at all) to purchase property. A close family member, usually a parent, will use equity in their own property to secure a mortgage for the borrower.

Generally, the equity must cover 20 per cent of the newly purchased property’s value. Guarantor loans also help borrowers avoid being charged Lenders Mortgage Insurance (LMI).

As hinted at above, guarantor loans do not come without risk. If the borrower is unable to make repayments, the guarantor may be legally required to pay the loan back.

Luckily, guarantors don’t have to stay on the loan for the entirety of the loan term – they can be released once the guaranteed part has been repaid.

What are the alternatives to a guarantor loan?

Low or no-deposit borrowers who aren’t able to get a guarantor loan, or don’t want one, still have options. Generally it’s very difficult to get a home loan with no deposit, unless you go the guarantor route.

However, you may be eligible for first home buyer assistance schemes offered by the government.

For example, the funds from the First Home Owner Grant can be put towards a deposit, and you can use your superannuation fund to help speed up the saving process.

Read more about buying a home with no deposit here.

See where you could buy with our Suburb Spotter Map

If buying a property soon is a priority, consider being flexible with where you buy. Aussie’s Suburb Spotter tool can help you figure out where you can afford to buy based on your deposit size.

Whether you want to learn more about guarantor loans, or find out how to buy property with a low deposit, your local Aussie broker can help you understand your options.

Want expert home loan help?

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