Guarantor Home Loans: How They Really Work
A family guarantee can get you into a home years sooner and save you LMI. But it puts a loved one’s property on the line, so both sides need to understand it.
7 min readAustralia-wide
For buyers with a solid income but not enough deposit, a guarantor home loan can be the difference between buying now and saving for another five years. It is one of the most powerful tools available to first home buyers, and also one of the most misunderstood. Here is exactly how it works, and what the guarantor is really agreeing to.
A guarantor loan lets a family member, usually a parent, use the equity in their own property as extra security for your loan. It can let you borrow up to the full purchase price plus costs, and often avoids Lenders Mortgage Insurance. The guarantor is liable only for a limited guaranteed portion, not your whole loan, and can be released later once you have built enough equity.
What a guarantor loan is
In a typical guarantor loan, a family member offers the equity in their home as additional security. Instead of the lender relying only on your deposit and the property you are buying, it also has a limited claim over the guarantor’s property for a defined amount. That extra security reduces the lender’s risk enough to lend you more, often the full price.
Crucially, the guarantee is usually limited. The guarantor secures only the portion needed to get your loan to a safe level, commonly the amount above 80 percent of the purchase price, not the entire loan.
How it helps you buy
Two big wins. First, you can often borrow up to 100 percent of the purchase price plus costs, so you may need little or no cash deposit, only funds for stamp duty and fees, and sometimes even those can be covered. Second, because the guarantee lifts your effective security above the 80 percent threshold, you can usually avoid LMI, saving thousands.
The net effect is you buy years earlier than you could by saving a full deposit, and in a rising market that head start can matter more than the deposit itself.
The risk to the guarantor
This is the part that deserves complete honesty. If you cannot repay and the loan defaults, the lender can call on the guarantee, and in the worst case the guarantor’s own property is at risk for the guaranteed amount. It is not a symbolic gesture; it is a real legal liability.
Lenders require the guarantor to get independent legal advice before signing, and for good reason. The guarantor should understand the guaranteed amount, the circumstances in which they could be called on, and how they can be released. Never rush a family member into this.
Who can be a guarantor
Most lenders prefer an immediate family member, typically a parent, who owns property with enough available equity and can demonstrate they understand the commitment. Some lenders consider siblings or, occasionally, extended family. The guarantor does not usually need a high income; it is their property equity that provides the security.
Guarantors close to retirement can still qualify with some lenders, but policies vary, which is where matching to the right lender matters.
Getting the guarantor released
The guarantee is not meant to last forever. Once your loan falls to a comfortable level relative to the value of the property you bought, usually around 80 percent, you can apply to have the guarantor released. That happens as you pay down the loan and, often more powerfully, as your property rises in value.
A good broker builds the release into the plan from day one, so everyone knows roughly when the guarantor comes off. If you are a first home buyer, also compare this with the First Home Guarantee, which achieves a low deposit purchase without involving family.
Common questions
Is a guarantor liable for my whole home loan?
Usually no. The guarantee is typically limited to the portion needed to bring your loan to a safe level, commonly the amount above 80 percent of the purchase price, not your entire loan. The exact guaranteed amount is set out in the documents the guarantor signs.
Can a guarantor loan help me avoid LMI?
Yes. Because the guarantor’s equity lifts your effective security above the 80 percent threshold, most guarantor loans avoid Lenders Mortgage Insurance, which can save thousands compared with a standard low deposit loan.
What happens if I cannot repay a guarantor loan?
If the loan defaults, the lender can ultimately call on the guarantee, and the guarantor’s property can be at risk for the guaranteed amount. This is why guarantors must get independent legal advice before agreeing, and why the arrangement should never be entered lightly.
When can a guarantor be released?
Once your loan reduces to a comfortable level relative to the value of the property, generally around 80 percent, you can apply to release the guarantor. This happens as you repay the loan and as the property grows in value, so it often comes sooner than people expect in a rising market.
Who can act as a guarantor?
Most lenders prefer an immediate family member, usually a parent, who owns property with enough available equity. Some lenders allow siblings or extended family. It is the guarantor’s property equity, rather than their income, that provides the security.
Thinking about a family guarantee?
A licensed broker can structure a guarantor loan properly, plan the guarantor’s release, and make sure everyone understands it. Free to you.