Going guarantor for your children's mortgage: the retirement risk that puts your home on the line

As housing affordability has worsened, more retirees and pre-retirees are being asked to go guarantor on an adult child's home loan — usually by offering the equity in their own home as extra security, so the child can buy without a full deposit and often avoid Lenders Mortgage Insurance (LMI). This "family guarantee" or "security guarantee," a major form of the "Bank of Mum and Dad," comes from the best of motives but is one of the riskiest financial decisions a retiree can make, because it puts your own home — usually your largest asset, your residence, and a cornerstone of your Age Pension position — directly at risk if the child defaults. As ASIC's Moneysmart bluntly warns, if the borrower can't make repayments you may have to repay the loan, and if you can't, the lender may repossess an asset you used as security, such as your home. For anyone considering it, a clear-eyed look at the structure, the risks, the protections and the alternatives — backed by independent legal and financial advice — is essential. This is a decision to slow right down.

Why are retirees being asked to go guarantor?

The driver is the affordability gap. High prices relative to incomes mean many young buyers can't save a full 20% deposit, and borrowing with less than 20% triggers LMI — a significant one-off cost that protects the lender, not the borrower. A parent guarantor who offers home equity as additional security lets the child borrow without that full deposit and often sidesteps the LMI. Retirees, frequently with substantial home equity and no mortgage of their own, are natural candidates to be asked. The request usually arrives wrapped in love and urgency — "we've found the perfect place, but we need your help to get the loan over the line" — which is exactly why it deserves calm, deliberate thought rather than an emotional yes.

How does a security guarantee actually work?

It helps to understand the structure precisely. In a typical security guarantee the parent does not guarantee the whole loan but a limited portion — commonly the amount needed to lift the child's effective deposit to 20% and so avoid LMI — with the parent's home mortgaged to the lender as security for that portion, in effect a second charge over the property. No cash changes hands: you aren't handing over money, you're pledging your home equity, and nothing is called for unless the guarantee is triggered by a default. The guarantee can usually be released once the child's loan is paid down enough that the property alone provides sufficient security — often when it falls below 80% of the property's value. But Moneysmart's warning is the one to hold onto: even with a limited guarantee, you could still lose an asset you use as security. "Limited" does not mean "small," and your whole home is the security backing the guaranteed amount.

What is the core risk to your home?

This has to be said plainly. If the child defaults and the lender sells the child's property, and that sale doesn't cover the debt, the lender can pursue the guaranteed amount against the security — your home. In a worst case you could be forced to sell, or have the home charged or sold by the lender, to satisfy the guaranteed amount. For a retiree the home is usually the largest asset, the roof overhead, and — through the main residence exemption — central to the Age Pension. Putting it at risk is putting retirement security itself at risk. And even a "limited" guarantee, say the 20% top-up on an expensive property, can be a large sum with the entire home behind it. The comforting framing — "it'll be fine, they'll never default" — has to be weighed against the cold question: what if it isn't fine?

What other consequences come with a guarantee?

The danger isn't only the default scenario. A guarantee is a contingent liability that can shrink your own borrowing capacity: as Moneysmart notes, if you later apply for a loan you must tell the lender about any loans you guarantee, and they may decline to lend even if the borrower is paying on time — which matters if you later want a reverse mortgage, a renovation loan, or the Home Equity Access Scheme. While the guarantee is on foot your home is encumbered, which can affect your ability to sell, downsize, or draw on your equity. There's the ongoing stress of carrying a contingent claim over your home, and the severe relationship strain a default would cause. And where there are several children, guaranteeing for one raises fairness and equalisation questions with the others. None of these is a reason never to help — but they are real costs alongside the headline risk.

How does Centrelink treat a guarantee, and what's the trap?

There's a nuance that can make a guarantee look more attractive than it should. A guarantee, in itself, is generally not an assessable asset for Centrelink — it's a contingent liability, not a held asset, and because it transfers nothing it isn't caught by the gifting and deprivation rules either. That contrasts with gifting a deposit, which does engage those rules: you can give away up to $10,000 in a single financial year and no more than $30,000 over five financial years before the excess is treated as a "deprived asset," counted in your assets test for five years and deemed under the income test. So a guarantee is "Centrelink-clean" up front — it doesn't reduce your assessable assets or trip the gifting rules the way a large gifted deposit might. But that apparent advantage must not obscure the home-at-risk danger: being Centrelink-neutral now is no comfort if the guarantee is later called and the home is lost. And if it is called and you pay out, or the home is sold to satisfy it, your financial position changes and is assessed accordingly.

What protections and alternatives should you consider?

A guarantee on foot when the parent dies is an often-missed complication: it generally continues, the estate is affected, and the home may not pass cleanly to beneficiaries until the guarantee is released or satisfied — so the executor inherits the contingent liability, and where one child was guaranteed and others weren't, the will may need to equalise to avoid disputes. If a guarantee does proceed, it should be limited to the necessary portion (never the whole loan), with clear, monitored release conditions that someone actually tracks and pursues when the loan-to-value ratio allows. Independent legal advice for the guarantor is generally required by the lender and essential regardless, and separate financial advice should test whether the guarantee is genuinely affordable for the retiree; Moneysmart's standing advice is to get independent legal and financial advice before you sign. The alternatives deserve equal weight: gifting a deposit caps the exposure to the gifted amount but is irreversible and engages the gifting rules above; a documented loan to the child is repayable but counts as an assessable financial asset of the parent (and is deemed); co-ownership shares both asset and risk, with its own CGT and Centrelink consequences; and sometimes the right answer is to decline — recognising that helping in a way that risks your own security can be the wrong help.

Worked examples

These two cases show the decision in context. They are illustrative only and not personal advice.

Helen, 67, a self-funded retiree, owns her home outright (about $1.1 million) and has $600,000 in super. Her daughter and son-in-law have found a $750,000 home but have only a 10% deposit, and the bank has suggested Helen go guarantor — a security guarantee over her home for the roughly $75,000 needed to reach a 20% deposit and avoid LMI. Her instinct is to say yes at once. On these facts Helen can probably absorb the risk, but should still proceed carefully: the guaranteed roughly $75,000 is well within what her $1.1 million home and $600,000 super could withstand in the worst case, so it wouldn't necessarily destroy her retirement security. On these facts the rational steps are to keep the guarantee strictly limited to that amount rather than the whole loan, lock in clear release conditions (and actually track when the loan drops below 80% and pursue release), obtain independent legal and financial advice (the lender will require the legal advice), satisfy herself about the couple's serviceability and the sensibleness of the purchase, and sort out the estate and equalisation picture if she has other children. With those protections, and given her capacity to take the worst case, it becomes a considered decision rather than a reflex.

Brian, 70, an age pensioner, has a home worth about $700,000 as his main asset and modest super of $150,000. His son asks him to guarantee a large portion of a $900,000 loan to buy in an expensive area, and the son has a variable income. On these facts the guarantee is dangerous and should give serious pause: the guaranteed amount would be large relative to a $700,000 home, the son's variable income raises the default risk, and a stretched purchase in a pricey area is more exposed to price falls. If the son defaulted, Brian — an age pensioner with little else — could lose his home, wrecking both his retirement security and his Age Pension position. On these facts the rational course is to have the sober conversation about whether Brian can afford to lose his home (almost certainly not), and to explore alternatives: a much smaller, strictly limited guarantee if any, a modest gift capped at what he could truly afford to lose (mindful of the $10,000/$30,000 gifting limits), or realistically declining and helping the son reset to a more affordable purchase. Independent legal and financial advice is essential here and may well counsel against proceeding at all.

For retirees weighing a guarantee for a child, the decision deserves to be slowed down and examined soberly, because the stakes are your own home and retirement security. The work is to state the risk plainly, examine the structure (limited portion versus whole loan, and the release conditions), test affordability (can you absorb the worst case without compromising retirement?), assess the child's genuine serviceability, weigh the Centrelink and estate implications (clean up front, but a complication at death and an equalisation question), compare the alternatives, and insist on the independent legal advice the lender usually requires anyway. The "Bank of Mum and Dad" is a powerful expression of love, and the wish to help a child into a home is deeply natural — but how that help is structured matters enormously. A limited, releasable, genuinely affordable guarantee can be reasonable; an open-ended or over-large one that puts an age pensioner's only home behind a child's stretched purchase can end in the loss of the very security retirement is meant to provide. The kindest thing is to make the decision with eyes open.

Sources

• Moneysmart (ASIC) — Going guarantor on a loan
• Services Australia — How much you can gift