What parents need to know about going guarantor on a mortgage

When you become a guarantor on your kid's home loan, it means you use your home equity as extra security against their loan. This helps make their borrowing such a large sum less risky to the lender, providing your kids with the financial support needed to guarantee or back it.

It also usually means they will pay fewer lender fees and potentially get a lower interest rate, especially if, as a guarantor, you are providing the equivalent of a 20% first deposit (which many lenders prefer). 

Parents helping their kids in this way is more common now, according to Mozo banking expert Peter Marshall.

"It’s a bit more understood that wealth transfers are better off happening when your parents are still around, so the kids don’t have to wait so long to get into the market and can deal with modern house prices,” he says.

But as popular as it has been in recent years, becoming a guarantor requires a big commitment and can be risky for parents.

To give you an idea of what to expect, let's take a closer look.

Australian Bureau of Statistics (ABS) figures released in mid-2024 indicate that the average mortgage has increased to $626,000.

That means first-time home buyers wanting to keep their loan-to-value ratio (LVR) below 80% and avoid paying lender's mortgage insurance (LMI) would have to save a deposit of at least $125,000.

Lender’s mortgage insurance alone can cost borrowers thousands or even tens of thousands of dollars, which is why it’s a cost many borrowers do their best to avoid. And when you add in other home buying costs like stamp duty, conveyancer fees as well as home insurance, purchasing a first home is not easy.

That’s where parents as guarantors come in. Not only can it help first-time home buyers to avoid paying LMI, but it can also mean giving them access to better home loan rates, as mentioned. After all, many of the sharpest rates are only available to borrowers with an LVR of 80% or less.

Keep in mind that some home loans allow for smaller deposits and still provide decent interest rates. These always need to be researched and compared first however.

Different banks and lenders have varying criteria in terms of who can act as a guarantor, but typically it’s a legal guardian or family member over the age of 18.

In Australia, it’s quite often parents who perform the role of guarantor, though grandparents and even siblings have been known to step into the role.

Also be aware that some lenders have maximum caps on the percentage of the loan a guarantor can provide. For example, Westpac says that a single guarantee can only represent up to 50% of the guarantor’s security.

Although having a parent or family member as a guarantor is great for young borrowers, it can be risky for the guarantor.

One of the main risks is that if the child can’t make monthly mortgage repayments, the guarantor can be liable instead – at least for the portion of the home loan they guaranteed.

If the child defaults on the mortgage, the lender will often sell their home to discharge the mortgage. But if there’s a shortfall – especially if the child had negative equity – the guarantor's own mortgage can be in jeopardy.

This is a considerable financial risk, so you should think long and hard before agreeing to go guarantor for your kids.

So what are some ways to make going guarantor on your kids home loan work for you?

• Get some good advice. Going guarantor on your child’s home loan is a big commitment, so before you do anything else, seek out some legal and financial advice so you’re fully aware of what’s involved. 

• Set a limit. An unlimited guarantee can lead to trouble, so instead of a blank cheque, think about limiting your guarantee to a portion of the property price – say 20%. 

• Find your nearest exit. Early on in the arrangement, sit down with your child and discuss when and how your part in their home loan will end. 

• Check on your insurance. Making sure your home insurance is up to date and offers adequate cover is key to making sure you – and your child – will be protected if something unexpected happens.

These tactics will help make the home buying process smoother for you and your child.

If you want to help your kids become home buyers but feel becoming a guarantor isn't right, there are a few other options to consider. 

Briefly, they are to:

1. Gift them the money. 

2. Help them save. 

3. Consider the FHLDS. The First Home Loan Deposit Scheme (FHLDS).

Are your kids looking for a home loan to get into the property market? Compare rates, fees, and features today by heading over to the Mozo home loan comparison hub.