A guarantor home loan lets a family member, usually a parent, use the equity in their own home as additional security for your loan. Done well, it can get you into a home with little or no cash deposit and no lenders mortgage insurance. Done carelessly, it puts the guarantor’s home at risk. Here’s how it really works.
How a guarantor loan works
The lender takes security over your new property plus a limited slice of the guarantor’s property, typically just enough to bring the effective loan-to-value ratio to 80%. You borrow up to 105% of the purchase price (covering stamp duty and costs), pay no LMI, and the guarantor never hands over cash.
The key protections
- Limited guarantee: the guarantor’s exposure is capped at a fixed dollar amount, not the whole loan.
- Release plan: once your loan drops below 80% of the property value (through repayments or growth), the guarantee is released. Many are released within 2–5 years.
- Independent advice: lenders require the guarantor to get legal (and often financial) advice before signing. That’s a feature, not a hurdle.
What the guarantor is really risking
If you default and the sale of your property doesn’t cover the debt, the lender can pursue the guaranteed amount, which could force the guarantor to pay up or, in the worst case, sell assets. This is why the guarantee should always be limited, and why the exit plan matters as much as the entry.
Guarantor loan vs gifted deposit
Parents who’d rather not tie up their property can gift or lend a deposit instead. A gift is simpler but permanent; a guarantee is reversible and keeps the parents’ money invested. Some families combine a small gift with the Home Guarantee Scheme and skip the guarantee entirely.
Not sure a guarantor is needed? Check how much deposit you actually require first.
How much deposit do I need? →Structuring it safely
The difference between a good and bad guarantor arrangement is structure: which lender, how the guarantee is limited, and when it’s released. Nathan can model it with your family, including the numbers that show exactly when Mum and Dad are off the hook.