Parents who sign on as guarantor for their child’s home loan are being warned they could be on the hook for nearly 14 years, as falling property prices hit the bank of mum and dad.
New Primara Research data shows parents are often shocked at just how long they are forced to help their kids if they sign on as guarantor.
Normally, a guarantor is released from a loan once the balance falls to 80 per cent of the property’s value.
But a forecast 10 per cent drop in national house prices over the next year is bad news for guarantors.
According to Primara, this 10 per cent fall would lock in the guarantor for 9.9 years.
If the house price doesn’t grow after the fall, the bank of mum and dad time period blows out to 13.5 years.
REA Group says prices have already fallen 3.3 per cent from their peak over six straight months of declines, driven by a mix of rising interest rates and tax changes.
Primara head of research Peter Drennan said many parents simply weren’t prepared for the likely scenario.
“Parents have not normally been in a situation where property prices have declined as much as they are predicted to fall,” he said.
“It is very difficult for them to be prepared when all they’ve seen is property prices rise.”
If house prices instead recover at the long-term average of 4.8 per cent a year, guarantors would be released in just 4.6 years.
And if the post-Covid run of 8.2 per cent a year growth returned, the bank of mum and dad would be off the hook in just 3.1 years.
Falling prices not helping first-home buyers
Rising interest rates have wiped out any benefit from falling house prices for first-home buyers, putting further pressure on those trying to break into the market.
In 2026, the RBA lifted the cash rate by 100 basis points, from 3.60 per cent to 4.60 per cent, as it works to bring down inflation.
Despite rising rates and government tax policies being blamed for falling house prices, it’s still not easy for first-home buyers to break into the market.
REA Group senior economist Anne Flaherty explained that higher rates were shrinking how much people could borrow, even as prices fall.
“Higher interest rates hurt mortgage holders, but quite interestingly it also has implications for people thinking about buying a home,” she said.
“What we’ve seen is that even though home prices have declined over the past six or so months, by reducing borrowing capacity as a result of higher rates, even with home prices falling, it has become more difficult for people to get into the market.”
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What happens if you’re forced to sell
Under the worst-case scenario, if a first-home buyer is forced to sell while prices are down 10 per cent, their guarantor could be left owing the bank close to $50,000.
Using the average home loan of $610,063 with a 5 per cent deposit, the value of a property worth $642,172 drops to about $578,000 after a 10 per cent fall, leaving negative equity of about $32,000.
If the buyer defaulted and the bank sold the property immediately, before any of the loan had been paid down, a sale after 3 per cent selling costs would recover about $561,000. That would leave the guarantor owing roughly $49,000.
Despite the alarming scenario, Mr Drennan was quick to point out this would only occur if the first-home buyer became a forced seller.
“It is only in a situation that you are a forced seller, so it is obviously not in every situation,” he said.
“If a person is having to sell and they have to pay back the bank, then if the sale doesn’t cover the loan, then that money has to come from somewhere.”