Guarantor Home Loan Risks for Parents: What You’re Really Signing Up For

By Andrew Paterson

If your son or daughter has asked you to go guarantor on their home loan, this one is written for you as the parent.

Most guides talk to the buyer about deposits and avoiding LMI. Far fewer explain what a family guarantee means for your home, your own borrowing and your retirement plans.

General information only. This doesn’t consider your personal situation and isn’t credit, legal or financial advice. Lender policies change, so check current rules before relying on anything here.

If you want the basics of how guarantor loans work first, start with our plain-English guide to guarantor home loans. This article picks up from there and looks at the risks on your side of the deal.

What sits on your home in a typical example

Numbers make the exposure easier to see. Say your daughter buys a $650,000 home with a 5% deposit of $32,500, so her loan is $617,500 (95% of the value).

To bring the loan back to 80% of the value ($520,000), the gap is $97,500. Lenders often add a small buffer, so the amount secured against your home might be around $100,000.

Item	Amount (indicative)
Property value	$650,000
Her deposit (5%)	$32,500
Loan amount (95% LVR)	$617,500
Amount secured on your home	~$100,000
LMI she avoids (estimate)	~$24,500 plus state stamp duty on the premium

The LMI figure is an estimate based on one insurer’s published rate at 95% LVR. Premiums vary by insurer, lender and state. Our explainer on how LMI works covers why.

So she saves roughly $25,000 or more upfront. In return, you carry about $100,000 of secured exposure plus some restrictions on your own property.

How much you are liable for depends on how the guarantee is written. Under the Banking Code of Practice, a bank’s guarantee must be limited to a stated amount or to the value of a stated property.

That limit can still be set at the full loan, which is why the type of guarantee matters. We compare the options in limited guarantee vs family guarantee.

Selling or refinancing your own home gets harder

This is the risk parents most often don’t see coming. While the guarantee is in place, part of your property is security for your child’s loan.

You generally can’t sell or refinance without first dealing with that security. Downsizing, renovating with a new loan or borrowing against your equity all become more complicated.

If your plans change, the usual paths are:

1. Wait until your child’s loan is at or below 80% of the property value, then apply to have the guarantee released.
2. Ask the lender whether it will accept substitute security, such as a cash deposit held with the lender.
3. Have your child pay down or refinance the guaranteed amount first.

None of these are quick, and each is at the lender’s discretion. If you might sell in the next few years, raise it with the lender before you sign.

The effect on your own borrowing

A lender assessing a new loan for you can treat the guarantee as a liability. That may reduce how much it will lend you, even though your child is making every repayment.

This matters most if you plan to buy an investment property, fund a renovation or move house while the guarantee is still in place. It matters again as you approach retirement, when lenders already look harder at how you would repay.

Guaranteeing more than one child

There is no legal cap on how many children you can support. The practical limits are your equity and the lender’s view of your finances.

• Equity: two guarantees of about $100,000 each tie up around $200,000 of your home’s value.
• Lender appetite: each lender sets its own rules on how much of your property it will accept as security.
• Your borrowing: every extra guarantee can shrink what you could borrow for yourself.
• Fairness: helping one child now may limit what you can do for a sibling later, so talk about it as a family.

Protections you have before you sign

Most banks subscribe to the Banking Code of Practice, which gives guarantors specific rights. Non-bank lenders aren’t bound by it, so ask which rules apply.

• You must be given key information, including the proposed loan contract and relevant financial information about the borrower.
• The bank won’t accept your guarantee until the third day after you receive that information, unless you confirm you have had independent legal advice.
• You should sign without the borrower present.
• You can withdraw at any time before the loan is funded, or later if the signed loan differs materially from the one you were shown.
• If your child defaults, the bank must send you a copy of any default notice or formal demand within 14 days of sending it.
• The bank must generally enforce its security over the borrower’s property before enforcing a mortgage you have given.

Those rules come from Part B6 of the Banking Code of Practice. They reduce the chance of signing something you don’t understand, but they don’t reduce what you could owe.

Independent legal and financial advice

Many lenders ask guarantors to get independent legal advice and provide a signed certificate before settlement. Even where it isn’t required, it is worth paying for.

Choose a solicitor with no connection to the lender, the broker or your child. Ask them to confirm:

• your maximum liability, in writing
• what happens if your child stops paying
• how and when the guarantee can be released
• what happens to the guarantee if you die or lose capacity.

ASIC’s Moneysmart warns that if the borrower can’t pay and you can’t cover the debt, the lender may sell assets you pledged, including your home. Its guide to going guarantor also notes that getting out of a guarantee can be difficult.

A financial adviser can test the plan against your retirement. Ask what happens to your cashflow if you had to cover repayments for six months, or pay out the guaranteed amount.

Planning your release from day one

A guarantee doesn’t have to last the life of the loan. Release usually becomes possible once the loan falls to about 80% of the property’s value, through repayments, price growth or both.

How long that takes depends on the market and how hard your child pays the loan down. Release is not automatic, so someone has to apply for it.

1. Check the loan balance against the property’s likely value each year.
2. Where the lender splits the guaranteed amount into its own account, direct extra repayments there.
3. When the loan looks close to 80%, ask the lender for a valuation.
4. Make sure the repayment history is clean, since lenders review conduct on the account.
5. Apply for the release and ask about any fees or paperwork, as the process varies by lender.

Insurance that protects the repayments

The best protection for your home is your child’s income continuing if something goes wrong. That makes their personal insurance your business too.

• Income protection pays a monthly benefit if they can’t work, commonly capped at up to 70% of income.
• Life cover can clear or reduce the debt if they die.
• TPD and trauma cover can help after a permanent disability or serious illness.

Read the terms of any narrow loan or mortgage protection policy carefully, as exclusions can limit what it pays. A licensed adviser can compare options.

Other ways to help

Going guarantor isn’t the only route. Depending on your child’s situation, these are worth comparing:

• The 5% Deposit Scheme: eligible first home buyers can buy with a 5% deposit and no LMI, with no security from you. There are no income caps, but property price caps apply, and our guide to the 5% Deposit Scheme explains the rules.
• A gift or loan of cash: your home stays unencumbered, but the money is gone or at risk. A written family agreement can help avoid disputes later.
• Your child paying LMI: this costs more upfront but leaves your property out of it.
• Help to Buy: the federal shared equity scheme has income and price caps and can’t be combined with the 5% Deposit Scheme.

When life gets complicated

Plan for the difficult scenarios while everyone is getting along.

• Your child separates: the loan may need restructuring or the property may be sold. Either way, the guarantee stays until the lender releases it.
• You become ill or die: a guarantee can remain a liability of your estate, so make sure your will and your executor account for it.
• Your child loses their income: this is where insurance and a small repayment buffer help most.
• You separate: a guarantee over a jointly owned home can complicate a property settlement.

Weighing it up

A family guarantee can help your child buy years sooner and save a large LMI bill. The cost is a limit on your own flexibility until the guarantee is released.

Go in with a written liability limit, your own advice and a release plan. If you would like help modelling your exposure and the likely path to release, we are happy to work through it with you.

Frequently asked questions

Can I sell my house while I’m a guarantor?

You can, but the guarantee security has to be dealt with first. That usually means a release once the loan is at or below 80% of the value, substitute security the lender accepts or your child reducing the guaranteed amount.

How long will I be a guarantor?

There is no set period. It depends on how quickly the loan is paid down and how the property’s value moves. Tracking the balance each year helps you spot the right time to apply.

Can I pull out after I have signed?

Under the Banking Code, you can withdraw any time before the bank provides the loan. After that, you can withdraw only in limited cases, such as the signed loan differing materially from the one you were shown.

Will the bank come after me first if my child misses payments?

Under the Banking Code, a bank must generally enforce its security over the borrower’s property before a mortgage you have given. You will also get a copy of any default notice or formal demand within 14 days.

Does a guarantee end automatically when the loan gets to 80%?

No. Someone needs to apply for the release, and the lender will usually want a current valuation and a good repayment record before agreeing.

Does the Banking Code apply to every lender?

No. It covers banks that subscribe to it. If the lender is a non-bank, ask what guarantor protections its contract and policies provide.