Guarantor Loans: How Family Guarantees Work + Risks

Saving a full 20% deposit can take years, and for a lot of first home buyers, a guarantor loan is what gets them into the market sooner. It’s a generous thing for a family member to offer, but it’s also a serious commitment that carries real risk for the guarantor, so it’s worth understanding exactly how it works before anyone signs anything.

What is a Guarantor Loan?

A guarantor loan is where a family member (usually a parent) uses the equity in their own property as additional security for your home loan, rather than lending you cash directly. This means you can potentially borrow up to 100% (or even a little over, to cover costs) of the property’s value without needing a full deposit yourself, and often without paying Lenders Mortgage Insurance (LMI).

Most guarantor arrangements are what’s called a limited guarantee, meaning the guarantor is only on the hook for a portion of the loan (enough to cover the shortfall in your deposit), not the entire loan amount.

How It Actually Works

  1. You apply for the home loan as normal, based on your own income and borrowing capacity.
  2. Your guarantor offers a portion of the equity in their own property as additional security.
  3. The bank effectively treats this extra security as if it were part of your deposit, reducing or removing the need for LMI and, in some cases, letting you borrow the full purchase price.
  4. You make all the repayments, the guarantor isn’t paying your mortgage, they’re just backing part of it with their property.

How Does a Guarantor Release Themselves?

A guarantor isn’t tied in forever. Once you’ve built up enough equity in the property, generally once your loan balance drops to around 80% of the property’s value (through a combination of your repayments and/or property value growth), you can apply to the lender to have the guarantor released.

This isn’t automatic, you’ll need to apply, the bank will usually require an updated valuation, and they’ll reassess whether you can service the loan on your own without the guarantee attached. It’s worth checking in with your lender or broker periodically once you think you’re getting close to that threshold.

Pros of a Guarantor Loan

  • Get into the market sooner, without needing to save a full deposit.
  • Avoid or reduce LMI, which can be a significant saving on a larger loan.
  • Borrow based on your own income, the guarantor isn’t required to help with repayments, just the security.

Cons and Risks (Mainly for the Guarantor)

  • The guarantor is legally liable for the guaranteed portion of the loan if you default and the lender can’t recover the full amount from selling the property.
  • It can affect the guarantor’s own borrowing capacity. The guaranteed amount may show up as a liability if the guarantor wants to borrow money themselves in the future, even though they’re not paying anything.
  • The guarantor’s own property is at risk. If things go badly wrong, the lender can pursue the guaranteed portion of equity in the guarantor’s property.
  • It’s not simple to undo. If the guarantor wants out earlier than planned, this depends entirely on the borrower’s equity position and the lender’s willingness to release them.
  • It can strain relationships if the borrower’s circumstances change (job loss, relationship breakdown, missed repayments) and the guarantor is left exposed.

Case Example

Jennifer wants to buy her first home for $600,000 but only has an $18,000 deposit. Her parents agree to a limited guarantee using the equity in their own home, covering the shortfall needed to get Jennifer to an effective 20% deposit position. This means Jennifer avoids LMI and can borrow the rest based on her own income. Three years later, Jennifer’s property has grown in value and her loan balance has dropped through regular repayments, bringing her down to 78% of the property’s value. She applies to her lender, provides an updated valuation, and her parents are released from the guarantee.

The Bottom Line

A guarantor loan can be a genuinely useful way to buy sooner and avoid LMI, but it’s a real financial and legal commitment for whoever’s providing the guarantee, not just a formality. Anyone considering it, both borrower and guarantor, should get their own independent legal advice before signing, and have an honest conversation about what happens if things don’t go to plan.