What to know before going guarantor on your child’s loan
Written and accurate as at: Feb 12, 2025 Current Stats & Facts
These days, many Aussies are stepping in to help their kids get their home loan applications over the line. That often takes the form of cash gifts, but there are other ways to assist that don't involve parting with your hard-earned savings, such as acting as a guarantor.
Put simply, going guarantor means using the equity in your home as security for your child’s loan, potentially allowing them to get on the property market sooner than they would have otherwise.
At a time when prices might be rising faster than potential borrowers might be able to save, a guarantor agreement can provide a much-needed leg-up for your child. But as a parent, there’s a lot you’ll need to know before jumping on board.
How does a guarantor arrangement work?
Let’s say Jacob is hoping to buy a $500,000 home and has saved up $40,000 towards that goal. Banks typically like to see a deposit equal to 20% of a property’s value, so Jacob is $60,000 short of the mark. Here’s where his homeowner parents, Lucy and Tom, might be able to step in.
So long as the bank is confident that Jacob can comfortably service the loan, it might agree to let his parents act as guarantors. The security they provide (in the form of equity in their home) will then make up for the shortfall in Jacob’s deposit.
This means Jacob won’t have to purchase Lenders Mortgage Insurance, which is usually necessary to offset the risk banks face when a borrower doesn’t have a 20% deposit saved up. The money he saves on LMI can then be put towards the mortgage, stamp duty or legal fees.
Before any documents are signed, the bank will do their best to make sure Lucy and Tom understand the risks involved. They’ll also be encouraged to seek legal advice from an independent third party.
Lucy and Tom’s guarantee can cover the entire amount Jacob intends to borrow or just part of it. And when Jacob builds up enough equity, whether by chipping away at the loan principal or seeing his home increase in value, he can arrange for his parents to be released from the guarantor arrangement.
What are the risks?
Being a guarantor for your child isn’t a decision that should be made lightly. While both of you might have the best of intentions at the outset, a sudden change of circumstances could spell trouble for the entire arrangement. Before you make any decisions, make sure you understand the risks:
- You’re on the hook for the loan if your child can’t pay: If your child is unable to service their mortgage, you’ll be liable for the portion you guaranteed. Failure to pay could result in the bank seizing your assets in order to settle the loan.
- It might affect your ability to get a loan: When you apply for a loan, banks and lenders will typically ask about any other loans you have as part of their serviceability assessment. If the guarantor arrangement is still in place, you might find you’re unable to take out any new loans or borrow as much as you want.
- It might strain your relationship: It’s not just your child’s chances at home ownership that hang in the balance — your relationship might suffer too. If things don’t go according to plan and you wind up having to step in to cover your child’s mortgage, it could create long-lasting tension, embarrassment or remorse.
As a parent, going guarantor might be preferable to some of the other ways to help your kids buy a home, such as gifting (or loaning) a lump sum or even signing up as a co-borrower. But before you make any decisions, make sure to weigh up the pros and cons as a family. For advice tailored to your unique circumstances, consider speaking to a financial adviser.
