What Is a Guarantor Home Loan?
A guarantor home loan is a mortgage where a third party — usually a parent or close family member — provides additional security for the loan using equity in their own property. The guarantor does not give the borrower money, and they don't need to make repayments. They simply allow the lender to use a portion of their property as additional security if needed.
The typical outcome is that the borrower can purchase a property with a smaller deposit (sometimes no deposit at all) and avoid paying Lenders Mortgage Insurance (LMI), which can save $10,000–$30,000+ depending on the loan size. The borrower remains solely responsible for the loan repayments.
⚡ Guarantor Loan at a Glance
- Who benefits: Borrower — can buy sooner, avoid LMI, achieve a lower LVR
- Who carries risk: Guarantor — their property is used as additional security
- Common structure: Borrower provides 5% deposit; guarantee covers the additional security needed to avoid LMI
- Release trigger: When borrower's property value supports 80% LVR without the guarantee
- LMI saving: Can eliminate LMI entirely — savings of $10,000–$35,000+
Types of Guarantee: Security vs Income
Security Guarantee (Most Common)
The guarantor's property is used as additional security for the loan. The guarantor provides no income guarantee — the lender relies entirely on the borrower's income to service the loan. The guarantor's property is only at risk if the borrower defaults AND the security property is insufficient to cover the debt. This is by far the most common type.
Income Guarantee (Less Common)
The guarantor also guarantees the repayments — meaning if the borrower cannot make repayments, the guarantor is expected to cover them. This is more onerous for the guarantor and is used in cases where the borrower's income alone is insufficient to service the required loan amount. Lenders will assess the guarantor's income carefully for this type.
Limited vs Unlimited Guarantee
A limited guarantee covers only a specified portion of the loan — for example, the guarantee might be limited to $150,000 of a $700,000 loan (enough to bridge the gap from 80% to 100% LVR). An unlimited guarantee covers the entire loan amount. Most brokers strongly recommend a limited guarantee to minimise the guarantor's exposure. Not all lenders offer limited guarantees, which is another reason broker advice is valuable here.
Who Can Be a Guarantor in Australia?
Lender requirements vary, but most require the guarantor to be:
- An immediate family member: Parents, step-parents, siblings (some lenders extend to grandparents and legal guardians)
- An Australian property owner: The guarantee property must be in Australia and have sufficient equity (lenders typically require at least 20% equity after accounting for the guarantee amount)
- Within age limits: Most lenders have upper age limits for guarantors — typically the guarantor must be able to service the guarantee until the loan matures (or guarantee is released), with many lenders setting a ceiling of 65–70 at that point
- Financially stable: The guarantor's own financial position will be assessed — income, debts, living expenses and existing mortgage obligations are all reviewed
Importantly: the guarantor does not need to be debt-free or mortgage-free. They simply need sufficient equity and a stable financial position. A parent with their own mortgage outstanding can still guarantee a child's loan, provided there is adequate equity in their property.
Guarantor Risks — Clearly Explained
Guarantor loans are not suitable for everyone. Both the borrower and guarantor need to understand these risks fully before proceeding.
Property at Risk
The guarantor's property is registered as security on the loan. If the borrower defaults, the lender can pursue the guarantor's property for the shortfall after realising all proceeds from the borrower's property. In a worst-case scenario, this could mean the guarantor losing equity in — or being forced to sell — their own home.
Limits on the Guarantor's Own Borrowing
While the guarantee is active, some lenders factor in the contingent liability when assessing the guarantor for their own loans. This could affect the guarantor's ability to access additional credit during the guarantee period.
Relationship Risks
Intertwining family finances with property ownership creates complexity. If the borrower's circumstances deteriorate — job loss, relationship breakdown, health issues — there can be family tension alongside the financial stress. Clear communication and legal documentation (including the borrower's will, insurance arrangements, and exit plans) are essential.
💡 Independent Legal Advice for Guarantors
Most lenders require guarantors to obtain independent legal advice before signing a guarantee. This is not just a formality — it is a genuine protection. A solicitor will explain exactly what is being signed, what happens in default scenarios, and what options the guarantor has. Legal Aid NSW offers free legal advice for eligible individuals. The ASIC MoneySmart guide on going guarantor is also strongly recommended reading.
How the Loan Is Structured
A typical guarantor loan structure works like this:
Borrower's loan
The main loan is taken in the borrower's name only for the full purchase price (say, $700,000). The borrower makes all repayments.
Security split
The lender takes a mortgage over both the borrower's new property AND the guarantor's property. The guarantee is typically limited to the amount needed to bring the borrower's LVR to 80% (avoiding LMI). For example: purchase price $700,000, borrower has $35,000 savings (5%), guarantee covers $105,000 — bringing total security to $840,000 and LVR to 80% of $700,000.
Title ownership
The borrower (not the guarantor) is typically the sole owner on the property title. The guarantor has no ownership stake — only a guarantee obligation. This is different from a joint purchase.
Insurance arrangements
Most financial advisers recommend the borrower take out mortgage protection insurance and income protection insurance to cover the loan in the event of illness, injury or death — protecting both the borrower and the guarantor.
How to Release the Guarantee
The guarantee is released when the loan balance has reduced to 80% or less of the property's current value — meaning the lender no longer needs the guarantor's property as additional security. This can happen through:
- Regular loan repayments reducing the outstanding balance over time
- Extra repayments made by the borrower to accelerate equity building (see our guide on refinancing strategies)
- Property value appreciation — if the property increases in value, the LVR falls even without additional repayments
To release the guarantee, the borrower contacts the lender and requests a formal valuation of the property. If the valuation confirms the LVR is at or below 80%, the guarantee can be released. The guarantor's property is then discharged from the mortgage, and they have no further obligation.
✅ Considering a Guarantor Loan?
Our broker partners can identify the lenders with the most favourable guarantor terms, structure the guarantee to minimise the guarantor's exposure, and guide both borrower and guarantor through the process. Book a free strategy call or use our Smart Home Loan Check to model your borrowing position.
Alternatives to a Guarantor Loan
If a guarantor loan isn't right for your situation, consider:
- First Home Guarantee (FHG): Government-backed scheme allowing 5% deposit with no LMI — no family involvement required. NSW cap: $1.5M. See Housing Australia for details.
- Family Home Guarantee: For single parents, purchasing with 2% deposit (government guarantees 18%).
- Professional LMI waivers: Doctors, lawyers, accountants and other professionals can access LMI waivers up to 90–95% LVR with select lenders. See our no-LMI professional guide.
- Joint purchase with parents: Parents become co-borrowers and co-owners — different legal implications but no separate guarantee structure. See our joint home loan guide.
Frequently Asked Questions
In most cases, a guarantor must be an immediate family member — typically a parent, step-parent or sibling. Some lenders extend this to grandparents. The guarantor must own property in Australia (which they use as security), be of working age (most lenders have upper age limits of 65–70 at loan maturity), have sufficient equity in their own property, and be able to service the guarantee obligation if called upon. Lenders will assess the guarantor's full financial position independently.
Yes, in principle. A guarantor can allow you to borrow up to 100% of the purchase price plus costs (called a 100% plus guarantee). However, most lenders prefer a structure where the borrower has some genuine savings, and the guarantor covers the gap between that savings and the required deposit. Having some genuine savings demonstrates financial discipline and is viewed more favourably by lenders.
The guarantor's own property is used as additional security for the loan. If the borrower defaults and the lender cannot recover the full debt from the borrower's property, the lender can pursue the guarantor's property for the shortfall. This is the most important risk for guarantors to understand. Guarantors should seek independent legal advice before signing. The Australian Securities and Investments Commission (ASIC) MoneySmart website has useful independent information on guarantor risks.
A guarantee can be released once the borrower has sufficient equity in the property — typically when the loan balance has been reduced to 80% or less of the current property value (80% LVR). You apply for a guarantee release by requesting a lender valuation. If the valuation confirms sufficient equity, the guarantor's property is released from the mortgage. In a rising market, this can happen faster than the loan repayment schedule suggests, particularly if you make extra repayments or the property appreciates.
The guarantee itself (if never called upon) does not affect the guarantor's credit score. However, the contingent liability may affect the guarantor's ability to obtain their own credit — some lenders factor in the potential guarantee obligation when assessing the guarantor's borrowing capacity for any future loans they may seek. If the guarantee is ever called upon and the guarantor cannot meet it, this would affect their credit record.