Surety Loans Up 71 Percent Across Australia In Six Years: Aussie Home Loans
Surety loans are up 71 percent in six years, new figures show as the soaring house price has led more parents to help their children climb the real estate ladder.
Mom and Dad’s bank has grown productive in Australia, has financed approximately $ 35 billion in loans and is now the ninth largest lender in the country.
While many choose to give away large sums of money, parents can alternatively act as guarantors by using the equity in their own home as collateral when their children don’t have enough cash to deposit.
Spring cleaning for home finance
Ever heard of loyalty tax? If you’ve been with the same lender, utility, or telecommunications provider for a long time, you could get a better deal elsewhere.
The jump in guaranteed loans took place from fiscal year 2014-15 to fiscal year 2020-21, according to a new analysis of data from Aussie Home Loans.
While there was a likely pandemic-related decline of eight percent between fiscal 2018-19 and fiscal year 2019-20, guaranteed loans rose again rapidly by 21 percent between fiscal years 2019-20 and 2020. 21.
The surge in this kind of parenting help has been driven by the sharp growth in house prices in recent years, especially since the pandemic-induced boom broke out, said David Hyman, CEO of Lendi Group, the parent company of Aussie Home Loans.
“The proportion of guarantors has increased relatively sharply,” said Hyman.
With the average home price approaching a million dollars in many cities, well above this landmark landmark in Sydney, that trend has only accelerated, he said.
“All this has the consequence, especially for first-time buyers and upgrades, that entry into a property is made more difficult. It’s a relatively low friction path for these buyers to get into real estate, ”he said, adding that possible macroprudential tightening – or how easy it is to get a home loan – would not solve the affordability issue.
“We will continue to see that guarantors have a place in the market. You just have to understand that it may take a little longer to release the guarantor or pledge [if property price growth slows],” he said.
The surge in loan guarantees, unheard of two decades ago, is a symptom of the rapidly deteriorating housing affordability in Australia, said Shane Oliver, chief economist at AMP Capital.
“Twenty years ago, mom and dad’s bank wasn’t even discussed, so I think this reflects the problems young people are facing with the deterioration in housing affordability,” said Dr. Oliver.
“To get into the real estate market at all, you have to borrow large sums of money and you need a large amount of dollars for the deposit, which also requires help.”
With first home buyers in some parts of Australia taking up to seven years and a month to save for a single family home, the time to leave a security deposit will likely only pass as prices keep rising, said Dr. Oliver.
“As real estate prices became less and less affordable, people have found ways to make this happen. It’s branded into the system, ”he said.
“What happened is that people found ways to live with poor affordability, and maybe that just perpetuates it, and government policy has partly gone that way too.”
The prevalence of surety loans has undoubtedly increased as it was the “next best option” after cash, according to Will Unkles, 40Forty director and mortgage broker.
“Giving away money is very simple and easy because it doesn’t bind the family home, but not everyone is [able to], so the next best option is to become a guarantor for the loan, ”said Mr. Unkles.
He warned that there are risks with surety loans if the property does not appreciate in value and the buyer is unable to maintain the loan repayment.
“At this point, the bank is owned by the parents and can fall back on if you can’t repay your loan,” he said. “Nobody cares in a flying market, but there will be a moment when real estate doesn’t grow as it is at the moment.”