Going Guarantor on a Loan — The Risks Explained

What Does Being a Guarantor Mean?

Being a guarantor means you agree to take responsibility for someone else's loan if they cannot make the repayments. Most commonly, parents go guarantor on their children's home loan. The lender can demand repayment from you if the primary borrower defaults, without first exhausting other options. You are essentially putting your own financial stability on the line for someone else's debt.

The Key Risks

The risks are significant. If the borrower stops making payments, the lender can come after you for the full amount — not just a portion. Your credit rating will be affected if the loan goes into default. If you own a home and used it as security for the guarantee, the lender could potentially force its sale. Your own borrowing capacity is also reduced because the guaranteed loan is treated as your liability.

How to Protect Yourself

If you decide to go guarantor, there are ways to limit your exposure. Ask for a limited guarantee — capped at a specific dollar amount rather than the full loan. Request that the lender pursue the borrower first before coming to you. Set a clear exit plan — when will the guarantee end (e.g., once the borrower reaches a certain loan-to-value ratio)? Get independent legal advice before signing any guarantee documents.

What Your Financial Statement Should Show

If you are a guarantor, your Statement of Advice or financial plan should reflect this liability. Your adviser should factor the guaranteed loan into your borrowing capacity, emergency fund planning, and risk profile. If your adviser has not addressed the impact of being a guarantor on your financial plan, ask them to review it.

How Guarantor Arrangements Work

A guarantor arrangement typically involves a parent (or close family member) using the equity in their home as additional security for a child's home loan. This allows the child to borrow more or avoid paying lenders mortgage insurance (LMI). The guarantor does not usually make payments — they provide security, not cash.

The guarantee is typically limited — the guarantor is only responsible for a specified portion of the loan (often 20-40%). Some guarantees are unlimited, meaning the guarantor could be liable for the entire loan if the borrower defaults. Most advisers recommend limited guarantees only.

Risks for Guarantors

Being a guarantor carries significant risks. If the borrower defaults, the lender can demand payment from you. If you cannot pay, the lender can force the sale of your home to recover the debt. Your credit rating will be affected if the loan goes into default.

Your borrowing capacity is reduced because lenders consider the guaranteed debt as your liability. This could affect your ability to refinance, take out a new loan, or access equity in your own home. Even if the borrower is making payments, the contingent liability is considered by credit assessments.

Protecting Yourself as a Guarantor

If you are considering being a guarantor: ensure the guarantee is limited (not unlimited), set a clear exit strategy and timeframe for the guarantee to be removed, require the borrower to keep you informed of their loan status, get independent legal advice before signing, and consider the impact on your own financial goals.

Most guarantor arrangements include a release clause — once the borrower's loan-to-value ratio reaches a certain level (e.g., 80%), the guarantee can be removed. Ensure this is documented in the loan agreement. Regularly check that the guarantee release conditions are being met.

Frequently Asked Questions

Can I be released as a guarantor?
Yes, once the borrower's loan-to-value ratio drops below a certain threshold (usually 80%), you can be released. Some loans have a fixed guarantee period. Request the release in writing once conditions are met.

What happens if the borrower misses payments?
The lender will contact the borrower first. If payments are not made, the lender can demand payment from you as guarantor. You should have a plan with the borrower for how to handle this situation.

Does being a guarantor affect my credit score?
Being a guarantor appears on your credit report as a contingent liability. It may affect your credit score and borrowing capacity. Late payments by the borrower will also appear on your credit report.

Should I get legal advice before becoming a guarantor?
Yes — this is strongly recommended. A lawyer can explain the legal implications, review the guarantee document, and ensure your rights are protected. The cost of legal advice is minor compared to the potential financial risk.