What parents need to know about going guarantor on a mortgage

House prices have become incredibly steep across Australia, making it more difficult for younger Australians to become first home buyers.

Many parents across the country have acted as the Bank of Mum & Dad and helped their kids get a foot on the property ladder. This means everything from letting kids stay home rent-free while they save for a deposit to going guarantor on their home loans. 

According to Mozo's Bank of Mum and Dad report in 2021, Australians lend an average of $70,000 to their children in order to help kids to compete in the property market.

When you go guarantor for your kids, it means they can use the equity built up in your home as extra security against their loan, and therefore pay less. But as popular as it’s becoming, this is a strategy that requires a big commitment and can be pretty risky for parents.

To give you an idea of what to expect, let's look at the advantages and disadvantages of going guarantor on your kids home loan, along with some tips for making it work.

Australian Bureau of Statistics (ABS) figures released in September 2023 indicate that the average mortgage amount nationwide you need to purchase an existing dwelling has increased to $593,000.

That means first-time home buyers wanting to keep their loan to value ratio (LVR) below 80% and avoid paying lenders mortgage insurance (LMI) would have to save a hefty deposit of at least $118,600.

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 buying costs like stamp duty, lender and conveyancer fees as well as 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. After all, many of the sharpest rates are only available to borrowers with an LVR of 80% or less.

While they’re the most common, parents aren’t the only possible guarantor option. Different banks and lenders have varying criteria in terms of who can act as one, but typically it’s a legal guardian or family member over the age of 18 (so siblings, aunts, uncles etc.).

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 your child can’t make their monthly home loan repayments, you can be liable instead – at least for the portion of the loan you guaranteed.

If your child defaults on the loan, the lender will often sell your child’s home first in order to discharge the mortgage. But if there’s a shortfall, it may be your home up on the chopping block next. This is a considerable risk, so you should think long and hard before agreeing to go guarantor for your kids.

Ask yourself honestly whether you trust your children to be financially responsible, and make sure you’re in a position where your savings can comfortably cover any problems that come up.

Being a guarantor might not necessarily be your first choice when helping your kids to get into the property market. So before you go down that path, think about other ways you can help without putting yourself at risk, as well as some of the other options that might be available. 

We’ve listed a couple below.

1. Gift them the money. Instead of acting as a guarantor, consider the possibility of providing money as a gift or an advanced inheritance that could be put towards a deposit. Or if you’re in the position to, buy the property on your child’s behalf or as a partner with your child.

2. Help them save. If providing support in the form of a guarantor home loan or via a monetary gift is not an option, consider offering your child the option of moving back home with you and letting them live there for a reduced rent (or rent-free).

3. Consider the FHLDS. The First Home Loan Deposit Scheme (FHLDS) allows first-time buyers with at least a 5% deposit to avoid having to pay LMI when taking out a home loan. Instead, the government will act as the guarantor for the remaining deposit amount.

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%. That’s enough that your children can avoid LMI, but it also limits the damage done to your own savings if your child defaults on their loan payments.
• Find your nearest exit. Early on in the arrangement, sit down with your child and discuss when and how your part in the loan will end. One way to do it is to plan for your child to refinance and discharge the mortgage on your home once there is enough equity built up in theirs. Having this strategy in place is practical and it serves as a reminder to your child that it’s your money and home involved, as well as theirs.
• Check on your insurance. The reality is that circumstances can change, and you should be prepared for the chance that your child may be in a position where they can’t make the repayments on their loan. Making sure your 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.

Are your kids looking for a home loan to get into the property market? There are 500 different home loans from more than 90 lenders in our database, so start comparing rates, fees and features today by heading over to the home loan comparison hub.