Guarantor Home Loans Australia: Complete Guide 2025

A guarantor home loan allows you to buy property with a family member (usually a parent) guaranteeing part or all of your loan. This enables you to borrow more, avoid LMI, and buy sooner. This guide explains how guarantor loans work, the benefits, and the risks.

What is a Guarantor Home Loan?

A family member (guarantor) uses their property equity to secure your home loan:

How it works:

1. You want to buy a home but lack deposit
2. Parent/family member offers to guarantee
3. Guarantor uses equity in their home as additional security
4. You can borrow more (up to 105%)
5. Avoid paying LMI
6. Guarantor released once you have 20% equity

Who can be a guarantor: ✅ Parents (most common) ✅ Siblings ✅ Spouse/partner (if not co-borrower) ✅ Sometimes extended family

Cannot be guarantor: Friends Business partners Third parties with financial interest

How Guarantor Loans Work

Types of Guarantees

1. Security Guarantee (Most Common)

Guarantor pledges property as security:

• Doesn't guarantee the debt
• Just provides extra security
• Lender has mortgage over guarantor's home
• Limited to specific amount (usually 20-30%)

Example:

• You borrow: $500,000
• Property value: $500,000 (100% LVR)
• Guarantor guarantees: $100,000 (20%)
• If default: Lender can claim $100k from guarantor's property

2. Full Guarantee

Guarantor guarantees entire loan:

• Liable for full amount
• Less common (higher risk)
• Lender can pursue entire debt

3. Limited Guarantee

Guarantor liable only for specific amount:

• Cap at agreed figure
• Common: 20-30% of loan
• Protects guarantor from full exposure

Loan Structure Example

Typical structure:

You want to buy:

• Property: $600,000
• Have saved: $30,000 (5%)
• Need to borrow: $570,000 (95%)
• LMI would be: $23,000+

Without guarantor:

• Need 20% deposit: $120,000
• Can't proceed

With guarantor:

• Parents' home: Worth $700,000, loan $200,000
• Parents' equity: $500,000
• Parents guarantee: $120,000 (20% of your purchase)

Split loans:

• Loan 1: $480,000 (80% of property)
  • Secured by your property only
  • No guarantor needed
• Loan 2: $120,000 (20% of property)
  • Secured by your property + guarantor's property
  • Guarantor provides security for this portion

Result: ✅ No LMI paid (saved $23,000+) ✅ You buy with only $30k deposit ✅ Guarantor liability limited to $120k ✅ Parents retain access to $380k equity

Benefits of Guarantor Loans

1. Buy Sooner (Less Deposit Needed)

Enter market years earlier:

Without guarantor:

• Save $120k deposit
• At $1,500/month savings
• Takes 80 months (6.7 years)

With guarantor:

• Need only $30k (5%)
• At $1,500/month savings
• Takes 20 months (1.7 years)
• Buy 5 years sooner!

Benefits of early entry:

• Property appreciates while you own it
• Build equity sooner
• Avoid rent increases
• Start wealth building earlier

2. Avoid LMI

Save thousands in insurance:

LMI costs:

• $500k loan, 95% LVR: ~$23,000
• $600k loan, 95% LVR: ~$28,000
• $700k loan, 90% LVR: ~$20,000

With guarantor:

• Effective 100% loan
• No LMI required
• Save $20-30k

Why no LMI:

• Lender has security from two properties
• Risk reduced (two properties vs one)
• Effective LVR under 80%

3. Borrow More

Increase borrowing capacity:

Example:

• Income: $80,000/year
• Can borrow: $480,000 (normal)
• With guarantor: Can borrow $600,000+

Why:

• Two incomes assessed (sometimes)
• Lower effective LVR = lower risk
• Better serviceability assessment

4. Better Interest Rates

Access standard rates despite high LVR:

Without guarantor:

• 95% LVR loan: 6.5% + LMI

With guarantor:

• Effective 100% loan: 6.0%
• No LMI premium
• Standard variable rates

5. Build Equity Faster

Start with more leverage:

Example 5 years:

• Property: $600,000 → $750,000
• Loan: $570,000 → $520,000
• Equity: $30,000 → $230,000
• Gained $200k equity

Then:

• Refinance to remove guarantor
• Release parents
• Own property independently

Risks for Guarantor

Critical to understand before guaranteeing:

1. Financial Liability

If borrower defaults:

• Lender can claim from guarantor's property
• May force sale of guarantor's home
• Debt recoverable from guarantor
• Can affect guarantor's retirement

Example worst case:

• You default owing $500k
• Your property sold: Recovers $450k
• Shortfall: $50k
• Lender claims from guarantor
• Guarantor must pay $50k

2. Reduced Borrowing Capacity

Guarantor's equity tied up:

• Can't access guaranteed portion
• Limits guarantor's borrowing
• May prevent downsizing
• Affects financial flexibility

Example:

• Guarantor's home: $700k value, $200k loan
• Usable equity normally: $360k (80% - loan)
• Guaranteed amount: $120k
• Available equity: $240k (reduced)

3. Relationship Risk

Family dynamics:

• Strain on relationship if issues
• Difficult conversations about finances
• Potential resentment
• Christmas dinner awkwardness

4. Long-Term Commitment

Not short-term:

• Average guarantee: 5-7 years
• Until you have 20% equity
• Market dependent
• Can't just "change mind"

5. Impact on Guarantor's Plans

May affect:

• Retirement plans
• Downsizing options
• Investment opportunities
• Lending capacity
• Estate planning

Risks for Borrower

1. Over-Borrowing

Easy to borrow too much:

• Can borrow more than you can afford
• Serviceability still applies
• Interest rate rises hurt more
• Repayment shock if rates increase

Example:

• Borrowed $600k with guarantor
• Could only afford $500k normally
• Extra $100k = $632/month extra
• If rates rise 2%: Pain doubles

2. Negative Equity Risk

If property market falls:

• Borrowed $600k (100%)
• Property falls to $540k (10% drop)
• Underwater: -$60k
• Can't refinance to release guarantor
• Guarantor stuck for years

3. Delayed Independence

Financially linked to parents:

• Can't release until 20% equity
• May take 5-10 years
• Affects relationship dynamics
• Delays financial independence

4. Pressure to Succeed

Emotional burden:

• Can't let parents down
• Stress if financial difficulty
• Fear of default consequences
• Mental health impact

Removing the Guarantee

Goal: Release guarantor ASAP

When You Can Remove Guarantor

Typically when: ✅ Property equity reaches 20% ✅ Original loan paid to 80% LVR ✅ No payment issues/arrears ✅ Stable employment/income ✅ Property revalued

Timeline:

• Best case: 2-3 years (with extra payments + growth)
• Average: 5-7 years
• Worst case: 10+ years (flat market, no extra payments)

Removal Process

Step 1: Build Equity (2-5 years)

• Make extra repayments
• Property appreciates
• Get to 20% equity

Step 2: Request Removal (6 months before target)

• Contact lender
• Request guarantee discharge
• Pay discharge fee

Step 3: Revaluation

• Bank orders new valuation
• Confirm equity position
• Costs: $300-$800

Step 4: Lender Assessment

• Checks payment history
• Confirms 20% equity
• Assesses current serviceability
• Reviews credit

Step 5: Discharge

• Lender removes guarantee
• Mortgage discharged from guarantor's property
• Guarantor released
• Single loan structure

Costs:

• Valuation: $300-$800
• Discharge fee: $300-$500
• Legal (if required): $500-$1,000
• Total: $1,000-$2,500

Guarantor Loan Requirements

For the Borrower

Standard requirements: ✅ Australian citizen/PR ✅ Stable employment (6-12 months) ✅ Good credit score ✅ Genuine savings (usually 5%) ✅ Proof of income ✅ Serviceability (can afford repayments)

Cannot have: Recent bankruptcy Significant defaults Poor credit history Irregular income (sometimes OK)

For the Guarantor

Must have: ✅ Property with sufficient equity (20%+) ✅ Good credit history ✅ Stable income (or retired with assets) ✅ Australian property ✅ Clear title (no caveats)

Equity required:

• Guarantor's equity: 20%+ in their property
• Plus amount to guarantee
• Example: Guarantee $120k, need $140k+ equity

Age considerations:

• No maximum age (usually)
• Retirees can be guarantors
• Must prove can maintain mortgage if called upon
• Some lenders have age limits (75-80)

Cannot guarantee if: In financial difficulty Poor credit history Already guaranteeing another loan (sometimes) Insufficient equity

Guarantor Loan Application Process

Timeline: 4-8 weeks

Week 1-2: Preparation

Borrower:

1. Check credit score
2. Gather documents (payslips, ID, etc.)
3. Calculate budget
4. Get pre-approval estimate

Guarantor: 5. Get copy of property title 6. Recent mortgage statement 7. Income proof 8. Consider independent legal advice

Week 2-4: Application

9. Submit full application
10. Both parties' documents provided
11. Property valued (your purchase)
12. Guarantor property valued
13. Serviceability assessed
14. Credit checks

Week 4-6: Approval

15. Conditional approval issued
16. Guarantor signs guarantee documents
17. Independent legal advice for guarantor (required)
18. Final approval granted

Week 6-8: Settlement

19. Loan documents signed
20. Guarantor documents executed
21. Settlement on your property
22. Mortgage registered (both properties)

Documents required (Borrower): ✅ ID, proof of income, bank statements ✅ Purchase contract ✅ Genuine savings evidence ✅ Employment verification

Documents required (Guarantor): ✅ ID, property title ✅ Mortgage statement ✅ Income/asset proof ✅ Independent legal advice certificate

Independent Legal Advice

Guarantor must get legal advice (mandatory):

Why required:

• Ensures guarantor understands risks
• Confirms voluntary decision
• Explains legal obligations
• Protects lender from future disputes

Process:

1. Lender provides guarantee documents
2. Guarantor takes to solicitor
3. Solicitor explains implications
4. Guarantor signs certificate
5. Certificate provided to lender

Cost: $300-$800

Cannot proceed without this

Common Guarantor Loan Mistakes

1. Guarantor Not Understanding Risk

Didn't read documents Thought it was "just a signature" Surprised when equity locked up

✅ Solution: Independent legal advice, full understanding before committing

2. Borrowing Maximum

Borrowed 105% because could Can barely afford repayments No buffer for rate rises

✅ Solution: Borrow conservatively, maintain buffer

3. No Plan to Remove Guarantee

Assumed would "work out" Making minimum payments Guarantor stuck for 15 years

✅ Solution: Active plan, extra repayments, target 5 years

4. Not Disclosing to Guarantor

Told parents "just a formality" Hid true financial position Relationship destroyed when issues arose

✅ Solution: Complete honesty with guarantor

5. Wrong Property Purchase

Bought overpriced property Market fell Negative equity for years

✅ Solution: Buy well, due diligence, realistic expectations

Tips for Guarantor Loan Success

For borrowers:

1. Borrow conservatively - Not maximum
2. Extra repayments - Remove guarantee ASAP
3. Protect relationship - Open communication
4. Have a plan - Target date to release
5. Stay employed - Stable income critical

For guarantors: 6. Understand fully - Read everything 7. Get legal advice - Don't skip this 8. Can afford to help - Comfortable with risk 9. Limit guarantee - 20-30% max 10. Monitor loan - Stay informed

For both: 11. Open communication - Talk about finances 12. Set expectations - Agree on release timeline 13. Written agreement - Document understanding 14. Review annually - Check progress to release 15. Professional advice - Broker, solicitor, financial planner

Alternatives to Guarantor Loans

Other options to consider:

First Home Loan Deposit Scheme (FHLDS)

Government guarantee instead:

• Buy with 5% deposit
• No guarantor needed
• Avoid LMI
• Limited places (10,000/year)

Save Larger Deposit

Traditional approach:

• Save 20% deposit
• No guarantor
• No LMI
• True independence

Parental Gift

Gift not guarantee:

• Parents give deposit money
• No ongoing liability
• Clean transaction
• May have tax implications

Shared Equity Schemes

Government co-owns:

• State schemes available
• Government owns 25-40%
• You buy with smaller deposit
• Buy out government later

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