Westpac has wheeled out some innovative incentives to retrieve market share in the first home buyer market while enhancing the risk profile of the new loans it writes.

Since last week the bank has been offering the parents of first home buyers fat term deposit rates if they agree to become guarantors on a child’s mortgage.

Under the new offer, parents can get 2.29 per cent annual interest on a two year fixed deposit if they agree to guarantee a child’s loan until their loan to value ratio falls below 80 per cent.

Westpac will pay the premium deposit rate on funds that equate to 20 per cent of the size of the loan taken out by the borrower.

So, if the loan amount is A$400,000, the parent providing the guarantee to the bank can earn 2.29 per cent for up to $80,000 held in a term deposit account.

The guarantor continues to earn the fixed rate of return until the borrower’s loan-to-value ratio falls below 80 per cent or a slightly lower LVR.

The Westpac offer might lure cashed up parents to take on some additional risk because most banks and credit unions are currently marketing 24 month deposit products at less than one per cent.

Canstar director Steve Mickenbecker said the new product could help Westpac rebuild its presence in the mortgage market.

“It is easily the best rate in the market,” he said.

“For people with cash they’re going to get a very good rate and at the same time help their kids get a home.”

Mickenbecker said he expected lenders to devise other similar product solutions to reduce credit risk and support lending volumes in the current economic environment.