Guarantor Home Loan Explained: Benefits and Real Risks

Yes, there is real risk in acting as a guarantor. If your child cannot make their mortgage repayments, you can be held liable for the outstanding debt up to the agreed guarantee amount. This is a legal obligation, not just a formality.

The good news is that lenders are not quick to act on this obligation. Banks prefer to recover money through negotiation and managed repayment rather than through forced property sales. The process of selling a home is expensive and time-consuming for the lender too, which means they have every incentive to find a workable solution before things reach that point.

Knowing the risks up front is important. It’s also worth understanding the broader factors that can affect a borrower’s ability to repay. Our article on why borrowing power can decline over time covers some of the financial pressures that affect loan serviceability.

The biggest misconception about guarantor loans is that lenders will rush to sell the guarantor’s home the moment a payment is missed. In practice, banks move slowly and only take drastic action as a last resort.

If your child falls behind on repayments, the lender’s first move is to contact them and find out what is going on. If one partner has lost their job but has strong employment prospects, some lenders will temporarily reduce repayments until they find new work. Others may offer a repayment pause or restructure the loan.

Lenders will only begin considering action on your child’s property after arrears have gone unpaid for 90 to 180 days. Actual repossession proceedings typically don’t begin until the arrears are around the nine-month mark. Throughout this entire process, the guarantor’s property is not touched.

Only if the bank has exhausted all other options — tried to negotiate with your child, taken action on their property, and still has a shortfall — would they look to the guarantor’s property. Even then, they only take what is needed to cover the limited guarantee amount.

One of the most overlooked features of guarantor loans is the limited guarantee. You are not putting your entire home on the line for the full value of your child’s loan. Instead, the guarantee is capped at an agreed amount — typically around 20% of the purchase price plus purchase costs.

Here is a practical example. Say your child borrows $700,000 and your limited guarantee is $140,000. If your child cannot repay the loan and their property is sold for $560,000, the lender recovers most of the debt from that sale. You would then be liable for up to $140,000 of the remaining shortfall. If the property sells for $700,000, your guarantee is not called upon at all.

If the guarantee is called and you don’t have cash savings to cover it, you may be able to use equity in your property, take out a second mortgage, or arrange a personal loan. The sale of your home is always the absolute last resort, and even then, only enough to cover the guarantee amount would be taken — the rest stays with you.

Once your child has built up enough equity in their property, you can apply to be released from the guarantee entirely.

Acting as a guarantor is a significant financial decision and should not be taken lightly. Before proceeding, both you and your child should seek independent financial and legal advice.

Ask yourself honestly: are you in a position to cover the guarantee amount if things go wrong? Is your child financially stable with a reliable income? Have they considered all the costs of homeownership, including rates, insurance, maintenance and potential rate rises?

A guarantor home loan can be a wonderful gift — getting your child into the property market years earlier than they could manage alone. But it works best when both parties understand the arrangement fully and go in with their eyes open.

Speak with a broker at Serres Property Finance to find out whether a guarantor loan is the right fit for your family’s situation and to get guidance on which lenders offer the most flexible guarantee structures.