Should parents guarantee their children's mortgages?

We’ll cut to the chase – it’s usually a bad idea.

I understand the sentiment behind it, and fully sympathise with parents trying to help the next generation onto the property ladder. In a red-hot housing market that’s rife with FOMO, many first-time buyers see house prices outmatching the deposits they have in hand. Enter the Bank of Mum and Dad. They have heaps of equity in their home, so why not guarantee the loan of an adult child?

There are two problems with this. Firstly, any guarantee needs to be backed with security. So the parents’ home is at risk if the son or daughter struggles with mortgage repayments. Many parents back away at this point.

Secondly, the bank will require the guarantor (i.e. Mum and Dad) to provide details of all their assets, liabilities, expenses and income – even if this is just the pension. In effect, the parents are applying for the loan so the bank will treat them like any other borrower under the Responsible Lending Code, and assess their ability to repay it. 

Trust me, no bank wants the headaches and horrible publicity of going after retirees who have been left to clean up their children’s financial messes. This is why they make potential guarantors go through all these hoops. It’s not a soft option.

So what do you do? I always recommend a family meeting. If I’m there, I can ensure everyone knows what’s involved before any promises are made. 

We may be able to suggest some other options that avoid the problems outlined above, while still enabling parents to help their children into a house. For example, if they own an unencumbered rental property, the parents may feel OK about offering this as security, rather than risking the family home.

There are other creative options, too. Get in touch if you’d like to find out more.