Home loan help: What parents need to know about going guarantor on a mortgage

Collage of a mum and dad researching going guarantor on a home loan for their kids.

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

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

"Getting help from your parents is becoming a more accepted mode of buying a house," explains 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.”

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 home loan less risky, so they pay fewer lender fees and get lower home loan interest rates

But as popular as it’s becoming, becoming a guarantor 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 kid's home loan, along with some tips for making it work.

Why become a guarantor?

Mother smiling about becoming a guarantor on her daughter's home loan

Australian Bureau of Statistics (ABS) figures released in December 2023 indicate that the average mortgage has increased to $610,332.

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 hefty deposit of at least $122,066.

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. After all, many of the sharpest rates are only available to borrowers with an LVR of 80% or less.

Who can be a guarantor?

Mum and dad researching going guarantor on a home loan.

Other people can become a guarantor, not just a parent. 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.

What are the risks of becoming a guarantor?

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 – it may be the guarantor's home on the chopping block next.

This is a considerable financial 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.

Other options for helping your kid buy property

Alternatives to going guarantor infographic: one off cash gift, help them save, use government schemes, or buy the house.

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

For example:

1. Gift them the money. Instead of acting as a guarantor, consider the possibility of providing money as a gift for a home loan deposit. Alternatively, you could buy the property on your child’s behalf, or as a mortgage 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.

Tips for parents becoming a guarantor

Father and son happy together about the father becoming a guarantor.

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 for your children to 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 their home loan will end. One way to do it is to plan for your child to refinance and discharge your part of the mother once they've accrued enough home equity. 
  • 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 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.

With any luck, these strategies can help make the home buying process smoother – for you, and your child.

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 home loan comparison hub.

Guarantor FAQs

What does guarantor mean?

A guarantor allows relatives (like a parent) to use the equity of their own home to cover part or all of a home loan. It provides borrowers security for the loan the same way a deposit does.

Who can be a guarantor on a mortgage?

Typically parents become guarantors for their children, but it’s not a written rule. Different lenders and banks have varying requirements in terms of who can be a guarantor. Usually, a legal guardian or family member over the age of 18 can become a guarantor. This includes siblings, uncles, grandparents, etc.

How much can I borrow if my parents go guarantor?

If your parents go guarantor, you can borrow up to 100% of the property price. However, this will also depend on what lender you go with and your guarantor’s financial situation, plus how much equity your parents are willing to use to help you. 

So make sure to double check with your lender and have a chat with your folks to see what is doable for them.

How long does a guarantor stay on a mortgage?

There is no time limit on how long a guarantor can stay on a mortgage. 

That means that your guarantor could be on your home loan until you discharge your mortgage. However, if your guarantor wants to be removed from the loan you’ll be required to refinance your loan.

When can a guarantor be released?

To release a guarantor you’ll either need to pay off your loan in its entirety or refinance your home loan.

What does a guarantor need to provide for a loan?

A guarantor will need to prove that they have a good credit score, equity in the property they’ll use as collateral and a stable income. The bank wants to know that your guarantor will not be a risk and be able to make repayments if you default on the loan.

Can I use my parent's equity as a deposit for a house?

Yes, as long as you have your parents' permission! The equity in their home can help you pay the deposit on a house.

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