Saving a 20% deposit in today’s market can take years. For many first home buyers, especially newer migrants who are still building a local credit history, that wait can feel endless. This is where a family member can step in. So, what is a guarantor loan? A guarantor home loan is a home loan where a parent or close family member uses the equity in their own property as extra security for your loan. They do not hand over cash. They back part of your loan instead.
Used well, a guarantor can help you buy your first home sooner, borrow up to the full purchase price with some lenders and avoid paying lenders mortgage insurance (LMI). Used carelessly, it can put the family home at risk. This guide explains how guarantor home loans work in Australia, the protections guarantors have, the real risks and how to remove the guarantee later.
Key Takeaways
A guarantor uses equity in their own property as security for part of your home loan. Most Australian lenders call this a family guarantee or family security guarantee.
Most guarantees are limited. The guarantor is usually liable only up to the guaranteed amount, not the whole loan.
A guarantor can help you avoid LMI and buy with a small deposit, or none at all with some lenders.
Guarantors should always get independent legal and financial advice before signing.
The guarantee can usually be removed once your loan to value ratio (LVR) falls to around 80%.
What Is a Guarantor Home Loan?
A guarantor home loan is a type of loan where someone other than the borrower agrees to be responsible for part of the debt. In Australia, the guarantor is usually a parent. Some lenders also accept grandparents, siblings, a spouse or another immediate family member. The guarantor is someone who owns property with enough equity to use as security.
Here is how it works. The lender takes a second mortgage over part of the guarantor’s existing home. That extra security covers the gap between your deposit and 80% of the purchase price. Because the lender now holds security worth at least 20%, it treats the loan as low risk.
For example, say you buy a $600,000 home with a $30,000 deposit. Without a guarantor, you would borrow 95% and pay LMI. With a guarantor offering $90,000 of equity from their home, the combined security reaches 20%. You can borrow the rest without LMI. The guarantor is liable only for that $90,000 portion, not the full loan amount.
Why Would You Use a Guarantor?
Lenders may ask for a guarantor, or a borrower may choose one, for several reasons:
Avoid paying LMI. Lenders mortgage insurance can add tens of thousands of dollars to a loan. A guarantor can remove it.
Buy with a smaller house deposit. Some lenders allow you to borrow up to 100% of the purchase price, and in some cases part of the stamp duty and legal fees.
Get on the property ladder sooner. You stop paying rent and start building equity earlier.
Strengthen a borderline application. Extra security can help when your deposit is smaller than required.
Keep in mind that a guarantor does not boost your income. You still need to show you can afford the loan and make the repayments on your own.
Guarantor Loan or the 5% Deposit Scheme?
Many first home buyers can now use the Australian Government 5% Deposit Scheme (the First Home Guarantee) instead. Since 1 October 2025, the scheme has no cap on places and no income test, and property price caps are higher. Eligible buyers can purchase with a 5% deposit and no LMI, without putting a family home on the line.
The scheme is only open to Australian citizens and permanent residents, and the property must sit under the price cap for its location. A family guarantee can suit buyers who fall outside these rules, want to buy above the cap or have less than 5% saved. A broker can compare both options for your situation.
What Are the Risks of Being a Guarantor?
Acting as a guarantor is a serious legal commitment. Before you go guarantor, understand the downside:
You may have to pay. If the borrower defaults and the sale of their property does not clear the debt, the lender can ask you to pay up to your guaranteed amount.
Your home is security. In the worst case, the lender can sell the part of your property used as security to recover the shortfall.
Your borrowing power may fall. Lenders count the guarantee when you apply for a loan yourself. This can reduce the amount you can borrow.
Your credit history can suffer. If you do not pay when the lender demands it, a default can be listed on your credit report. Defaults stay on an Australian credit file for five years.
Family relationships can strain. Money problems between parents and children are hard to talk about. Agree on a plan before anyone signs.
An unlimited guarantee, where you back the whole loan, carries much more risk. Make sure you know which type you are signing.
How Are Guarantors Protected in Australia?
Banks that follow the Banking Code of Practice must give guarantors clear protections. These generally include:
Time to think. You usually get at least three days to consider the documents, unless you have already received independent legal advice.
Full information. You can ask for the loan contract, the borrower’s credit report and relevant financial information before you sign.
A limit on liability. You can ask to cap the amount you guarantee.
The right to withdraw. You can generally pull out before the loan is drawn down, or if the final loan is materially different from what you agreed to.
Borrower first. The lender will usually try to recover the debt from the borrower before it turns to the guarantor.
Before you sign, check the exact amount you are guaranteeing, which property is used as security, and how the guarantee can be released. Some lenders require guarantors to get independent legal and financial advice, separate from the borrower. Even when it is optional, it is worth the fee.
Working with a broker who understands your language and your family’s situation can make the difference between a rushed decision and a confident one.
Everest Home Loans helps families across Australia in English, Nepali and Hindi. With access to more than 40 lenders and over 10 years of broking experience, we can explain each lender’s guarantor rules and loan products in plain language. Speaking with an experienced mortgage broker helps you compare the benefits and risks before anyone signs.
How Do You Remove the Guarantee?
A guarantee does not have to last for the life of the loan. Once your loan balance falls to around 80% of the property’s value, you can apply to remove the guarantee. This can happen faster than you expect through:
Extra repayments that reduce your loan
Growth in your property’s value
A mix of both
The lender will usually order a new valuation. If the numbers work, it releases the guarantor’s property. Fees and charges may apply, so ask your lender or broker first.
To Sum Up
A guarantor home loan can help you buy a home sooner, avoid LMI and get on the property ladder without a large deposit. It also asks a lot of the family member who backs you. Compare it with the 5% Deposit Scheme, understand the risks and get independent advice before signing. If you are weighing this option, Everest Home Loans offers a free consultation to look at your situation and find the right path for your family.
Frequently Asked Questions
Who Can Be a Guarantor for a Home Loan?
Most lenders accept parents. Some also accept grandparents, siblings, spouses or other immediate family members. The guarantor usually needs to own property in Australia with enough equity, and some lenders also check their age, income or ability to repay. Being a guarantor for a friend is rarely accepted.
Can a Guarantor Be Removed From a Loan Later?
Yes. Once your loan to value ratio drops to about 80%, you can apply to remove the guarantee. The lender will usually need a new valuation and a formal application.
Does Being a Guarantor Affect Your Credit Score?
Signing a guarantee does not usually hurt your credit score by itself. A default can be listed if you fail to pay when the lender demands it. Lenders will also count the guarantee when you apply for credit, which can lower the amount you can borrow.
What Is the Difference Between a Guarantor and a Co-Borrower?
A co-borrower is named on the loan, shares the repayments from day one and is responsible for the whole debt. A guarantor is not usually on the property title and only becomes liable, up to the guaranteed amount, if the borrower defaults.
How Much Deposit Do You Need With a Guarantor?
Some lenders accept no deposit at all when a guarantor covers the full 20%. Many still like to see some genuine savings, so having a small home deposit can strengthen your application.
This article is general information only and does not consider your personal objectives, financial situation or needs. Lender policies change, so seek advice before acting.
