Guarantor Home Loans For First Home Buyers

Saving a deposit remains one of the biggest challenges for first home buyers in Australia.

Property prices, rent and everyday expenses can all compete for your income. As a result, saving a 20% deposit can take years.

However, you may not need to save the entire deposit yourself.

A guarantor home loan lets an eligible family member use equity in their property as additional security for your mortgage.

This arrangement could help you enter the property market sooner. It may also reduce your upfront costs and help you avoid Lenders Mortgage Insurance (LMI).

However, guarantor home loans also create financial risks. If you fail to meet your repayments, the lender may require your guarantor to meet their obligations.

Understanding how these loans work can help you assess whether they suit your circumstances.

This guide explains guarantor home loans for first home buyers in Australia. It covers the benefits, eligibility requirements, costs, risks and alternatives.

Guarantor Home Loans At A Glance

Key point	What first home buyers need to know
What is a guarantor home loan?	A loan that uses a family member’s property equity as additional security for your mortgage.
Who can be a guarantor?	Eligible family members, commonly parents, although requirements vary between lenders.
How much deposit do you need?	Some lenders may accept deposits as low as 5%, or potentially no cash deposit, subject to eligibility.
Can you avoid LMI?	Yes, an eligible guarantor arrangement may help you avoid LMI, depending on the lender’s requirements.
Does the guarantor need to provide cash?	Usually not. They typically provide property equity as additional security.
Does the guarantor become a co-owner?	No. A guarantor does not usually become an owner of the purchased property.
What are the main risks?	The guarantor could become liable for the guaranteed debt and potentially lose their property if the borrower defaults.
Can the guarantor be released?	Yes, subject to the lender’s approval and the borrower’s ability to meet the loan requirements independently.
Is loan approval guaranteed?	No. Borrowers must still meet the lender’s income, credit and repayment capacity requirements.
What are the alternatives?	A larger deposit, eligible government guarantee schemes, a family cash gift or a standard low-deposit home loan.

What Is a Guarantor Home Loan?

A guarantor home loan lets another person provide additional security for your mortgage.

Usually, the guarantor is a parent or close family member who owns property. They agree to use some of their property equity as security for your loan.

Unlike a cash gift, a guarantor does not usually provide money upfront. Instead, they provide a guarantee that gives the lender additional security.

For example, you want to buy a $600,000 property. You have saved a $30,000 deposit, which represents 5% of the purchase price.

However, some lenders may require a larger deposit for certain home loans. Without additional support, you may struggle to secure the finance you need.

With an eligible guarantor, a lender may allow you to borrow the required amount using additional security from the guarantor’s property.

This could help you buy your first home without waiting several more years to build a larger deposit.

Importantly, the guarantor does not automatically become a co-owner of your new property. They also do not usually make your regular loan repayments.

However, they accept legal and financial responsibility if you fail to meet your loan obligations. The guarantee agreement determines the extent of that responsibility.

How Does a Guarantor Home Loan Work?

A family guarantee home loan combines the security of your new property with additional security from your guarantor’s property.

The lender assesses your income, expenses, credit history and ability to repay the loan. It also assesses the guarantor’s financial position and available property equity.

If you meet the lender’s requirements, the guarantor agrees to provide either a limited or broader guarantee.

A limited guarantee generally restricts the guarantor’s liability to an agreed amount. This amount may cover only part of the loan rather than the entire debt.

The lender then uses the additional security to reduce its exposure if you cannot repay the loan.

Here is a simplified example.

You want to purchase a $600,000 home and have saved a $30,000 deposit.

Property purchase price	$600,000
Your savings	$30,000
Deposit percentage	5%
Required loan before costs	$570,000
Loan-to-value ratio (LVR)	95%

Illustrative figures only. This example assumes you use the full $30,000 as the deposit and excludes purchase costs.

A 95% loan-to-value ratio (LVR) may trigger Lenders Mortgage Insurance or require additional security.

If an eligible family member owns a property with sufficient usable equity, they may guarantee part of your loan.

The lender could then approve the loan without requiring you to pay LMI, subject to its lending criteria.

However, a guarantor does not guarantee loan approval. You must still demonstrate that you can afford the repayments.

Who Can Be a Guarantor for a First Home Loan?

Not everyone can act as a guarantor.

Lenders set specific eligibility requirements based on family relationships, property ownership and financial circumstances.

Generally, lenders may accept:

• Parents: The most common guarantors for first home buyers.
• Grandparents: Some lenders accept grandparents who meet their requirements.
• Siblings: Certain lenders may accept brothers or sisters as guarantors.
• Other close relatives: Some lenders consider other family members under their policies.

However, each lender sets its own rules.

Some lenders only accept parents. Others consider a wider range of relatives.

Can Retired Parents Be Guarantors?

Yes, some lenders allow retired parents to act as guarantors.

Retirement does not automatically prevent someone from providing a guarantee. However, the lender will assess their financial position, property equity and ability to manage potential risks.

For example, a retired parent may own a mortgage-free home. They could potentially use some of its equity to support their child’s home loan.

However, lenders may consider their age, retirement income and future financial needs.

The guarantor must also understand the consequences of potentially losing their property.

Can Someone Who Still Has a Mortgage Be a Guarantor?

Yes, a guarantor does not necessarily need to own their property outright.

However, they must have sufficient usable equity after accounting for their existing mortgage and the lender’s requirements.

For example, your parents own a property worth $900,000. They still owe $300,000 on their existing home loan.

Their property has $600,000 in gross equity before lender restrictions and other considerations.

The lender may accept some of that equity as additional security. However, the actual amount depends on the property valuation, existing debts and lending policy.

How Much Equity Does a Guarantor Need?

The required equity depends on several factors.

These include your deposit, the purchase price and the lender’s maximum LVR requirements.

Equity represents the difference between a property’s current market value and the outstanding mortgage secured against it.

However, you cannot automatically use all your equity as security.

Lenders usually apply their own limits to protect against property value changes and repayment risks.

Example of Guarantor Equity

Your parents own a home valued at $1 million. They have an outstanding mortgage of $400,000.

Illustrative guarantor property	Amount
Estimated property value	$1,000,000
Existing mortgage	$400,000
Gross equity	$600,000

Note: The $600,000 represents gross equity, not the amount automatically available as security.

The lender may calculate available equity using its acceptable LVR against the guarantor’s property.

For example, if the lender permits lending up to 80% of the property’s value:

• Property value: $1,000,000
• Maximum lending at 80% LVR: $800,000
• Existing mortgage: $400,000
• Potential equity within the 80% LVR limit: $400,000

This does not mean the lender will accept a $400,000 guarantee.

Instead, it provides a simplified estimate before other lending restrictions.

The lender will also assess the guarantor’s existing financial commitments and proposed guarantee.

Types of Guarantor Home Loans

Different guarantor arrangements can support different borrowing needs.

However, the lender determines which products and guarantee structures you can use.

1. Family Guarantee Home Loan

A family guarantee home loan lets an eligible family member use property equity as additional security.

This arrangement can help first home buyers who have limited savings but enough income to manage the repayments.

The guarantee may cover part of the loan required to meet the lender’s deposit or LVR requirements.

2. Limited Guarantee Home Loan

A limited guarantee restricts the guarantor’s liability to an agreed amount or specified portion of the loan.

For example, a parent might guarantee $80,000 of their child’s home loan.

The lender’s guarantee documents determine exactly what that amount covers.

A limited guarantee can reduce the guarantor’s exposure. However, the property used as security may still face enforcement action if the borrower defaults.

The guarantor should confirm whether interest, enforcement costs and other charges fall within or outside the agreed limit.

3. Parental Guarantee Home Loan

A parental guarantee home loan involves a parent providing additional security for their child’s mortgage.

This arrangement can help first home buyers who have stable employment but struggle to save a traditional deposit.

Depending on the lender, the parent may use equity in their existing home.

The parent generally does not need to become a co-borrower or owner of the new property.

4. Security Guarantee for Buying Costs

Some lenders may allow a guarantee to cover eligible purchasing costs as well as a deposit shortfall.

These costs could include stamp duty, conveyancing fees and other eligible expenses.

Certain lenders may consider loans that exceed 100% of the property’s purchase price.

However, these arrangements involve strict lender requirements.

Do not assume that every lender will finance all purchase costs through a guarantee.

Benefits of Guarantor Home Loans for First Home Buyers

A guarantor arrangement can help eligible first home buyers overcome some barriers to buying property.

However, the benefits depend on the lender, the borrower’s circumstances and the guarantee structure.

1. Buy a Home With a Smaller Deposit

Saving a deposit can take years, particularly when you pay rent and manage everyday expenses.

A guarantor home loan with a low deposit may help eligible buyers purchase a property earlier.

Instead of saving a traditional 20% deposit, you may contribute a much smaller amount.

Some lenders may even consider applications without a cash deposit.

However, you must still demonstrate sufficient income and repayment capacity.

2. Potentially Avoid Lenders Mortgage Insurance

Lenders Mortgage Insurance protects the lender if you default and the property sale does not cover the outstanding debt.

It does not protect the borrower or guarantor.

LMI commonly applies to loans with an LVR above 80%. However, eligible guarantees and other arrangements may remove this requirement.

A guarantor may provide enough additional security for you to avoid LMI.

This could reduce your upfront borrowing costs.

However, compare the risks of the guarantee with the LMI premium the lender would otherwise charge.

3. Buy Your First Home Sooner

A larger deposit can take considerable time to accumulate.

Meanwhile, property prices, rent and other living expenses can change.

A family guarantee may help eligible buyers overcome a deposit shortfall without waiting to save a traditional deposit.

However, buying sooner does not automatically make a property affordable.

You still need to account for repayments, maintenance and other ownership costs.

4. Keep More Savings Available

Some buyers have enough savings for a small deposit but little money left afterwards.

A guarantor arrangement may reduce the cash you need upfront.

Depending on your circumstances, this could leave more savings available for moving costs, furniture, emergencies and property maintenance.

However, you should still maintain an emergency fund after settlement.

5. Reduce the Need for Additional Borrowing

Without a suitable guarantee, some buyers may consider personal loans or other borrowing to cover a deposit shortfall.

Additional debt can increase monthly repayments and affect borrowing capacity.

A guarantor arrangement may provide another way to meet the lender’s security requirements.

However, it does not remove the need to demonstrate genuine repayment capacity.

Risks of Guarantor Home Loans

A guarantor home loan can help you enter the property market.

However, it also exposes the guarantor to significant financial risks.

Before agreeing to a guarantee, both parties should understand what could happen if the borrower cannot repay the loan.

1. The Guarantor Could Lose Their Property

The property used as security carries the most significant risk.

If the borrower defaults, the lender may demand repayment from the guarantor under the guarantee agreement.

If the guarantor cannot meet that obligation, the lender may take enforcement action against the secured property.

In serious cases, the lender could sell the guarantor’s property to recover the debt.

The guarantee, loan contract and applicable law determine the exact consequences.

2. The Guarantor’s Borrowing Capacity May Decrease

A guarantee can affect the guarantor’s ability to obtain future finance.

For example, a parent may later want to refinance their mortgage, purchase an investment property or help another family member.

The lender may consider the existing guarantee when assessing their financial commitments.

As a result, the guarantee could reduce their borrowing capacity or affect their ability to obtain another loan.

3. The Borrower Could Face Financial Pressure

A guarantor helps with the loan’s security requirements.

However, the borrower remains responsible for making the repayments.

A larger loan can mean higher monthly repayments and more interest over time.

If your income falls or expenses rise, those repayments may become difficult to manage.

You should assess your ability to repay the loan under different financial circumstances.

4. Family Relationships Could Become Strained

Money can create tension, even between close family members.

Financial difficulties could leave the guarantor responsible for part or all of the guaranteed debt.

Disagreements may arise over repayments, selling property or releasing the guarantee.

Both parties should discuss expectations before signing any documents.

They should also agree on how they will communicate if financial difficulties arise.

5. The Guarantee May Affect Credit Records

If the borrower defaults and the guarantor cannot meet their obligations, the lender may take action that affects their credit history.

A default or other adverse credit reporting may make future borrowing more difficult.

The consequences depend on the circumstances, applicable reporting rules and how the parties manage the debt.

6. The Guarantee May Be Difficult to Exit

A guarantor cannot usually withdraw from the arrangement simply because they change their mind.

The lender must formally approve the release.

If the borrower has not reduced the loan sufficiently or cannot refinance independently, the lender may refuse the request.

Therefore, both parties should understand the release conditions before proceeding.

How to Get Released From a Guarantor Home Loan

One of the most important considerations involves understanding when a guarantor can exit the arrangement.

A guarantor release removes the guarantor’s legal responsibility under the guarantee, subject to the lender’s formal approval.

Usually, the borrower needs to show that they can continue the home loan without the additional security.

When Can a Guarantor Be Released?

A lender may consider releasing a guarantor when:

• The borrower has reduced the outstanding loan balance.
• The property value has increased sufficiently.
• The borrower’s LVR meets the lender’s requirements.
• The borrower can independently meet the lender’s serviceability requirements.
• The lender has adequate security for the remaining loan.

For example, you purchase a property for $600,000 with a $570,000 home loan.

Your parents provide a guarantee to help you purchase the property with a smaller deposit.

Several years later, your outstanding loan balance falls to $450,000. Meanwhile, your property increases in value to $650,000.

Your new LVR would be approximately 69.2%.

Illustrative guarantor release example

The lower LVR may support a release application, subject to the lender’s assessment.

However, an LVR below 80% does not automatically end the guarantee.

You must apply for a formal release and meet the lender’s requirements.

The lender may also require a new property valuation or updated financial documents.

Can You Refinance to Remove a Guarantor?

Yes, refinancing may provide another way to release a guarantor.

You could refinance with your existing lender or another lender, provided you meet their lending criteria.

However, refinancing involves another lending assessment and may involve additional fees.

You should also compare loan features and any applicable discharge costs before proceeding.

Guarantor Home Loan Eligibility Requirements

Both the borrower and guarantor must meet the lender’s eligibility requirements.

Requirements vary between lenders. However, most applications involve several key considerations.

Borrower Eligibility

First home buyers generally need to demonstrate that they:

• Are at least 18 years old.
• Have a reliable and acceptable source of income.
• Can afford the proposed loan repayments.
• Have a satisfactory credit history.
• Meet the lender’s deposit and genuine savings requirements, where applicable.
• Have enough funds for upfront costs not covered by the loan.

Lenders also assess existing debts, living expenses, dependants and employment circumstances.

A guarantor cannot replace the borrower’s ability to repay the loan.

Guarantor Eligibility

The guarantor generally needs to:

• Meet the lender’s accepted family relationship requirements.
• Own an acceptable property in Australia.
• Have sufficient available equity.
• Meet the lender’s financial and credit assessment requirements.
• Understand the legal obligations of providing a guarantee.
• Obtain independent legal advice where the lender requires it.

The guarantor must also agree to the security arrangement voluntarily.

Lenders may impose additional requirements on retired guarantors, borrowers with complex finances or properties with existing mortgages.

How to Apply for a Guarantor Home Loan

Applying for a guarantor home loan involves assessing both the borrower’s finances and the guarantor’s property.

The process varies between lenders. However, these steps generally apply.

Step 1: Assess Your Financial Position

Start by reviewing your income, expenses, savings and existing debts.

Calculate how much you can comfortably contribute towards the purchase.

You should also estimate your borrowing capacity and potential repayments.

APRA expects authorised deposit-taking institutions to assess whether borrowers can afford their home loans under periods of financial stress.

Therefore, a guarantor cannot compensate for a loan you cannot reasonably afford.

Step 2: Discuss the Arrangement With Your Guarantor

Once you understand your financial position, discuss the proposed arrangement with your family member.

Explain how much security you need and how the guarantee could affect their property.

Both parties should understand their responsibilities, potential risks and expected timeframe.

Give your guarantor enough time to consider the decision without pressure.

Step 3: Calculate the Available Equity

The lender needs to establish whether your guarantor has enough acceptable equity.

It will need to assess the property’s value, outstanding mortgage and existing financial commitments.

Banks may also require a property valuation.

Remember that gross equity does not necessarily equal the amount the lender will accept as security.

Step 4: Compare Lenders and Loan Options

Not all lenders offer the same guarantor home loan products.

Compare their eligibility requirements, guarantee limits, interest rates, fees and release conditions.

You should also check whether the lender offers a limited guarantee or requires broader security.

Consider whether an eligible government home-buying scheme could meet your needs without involving a family guarantee.

Step 5: Obtain Independent Legal Advice

Before signing, the guarantor should obtain independent legal advice.

A solicitor can explain the guarantee agreement, the guarantor’s obligations and the circumstances in which the lender may enforce it.

The borrower should also understand the loan contract and repayment responsibilities.

The lender may require confirmation that the guarantor received independent legal advice before approving the application.

ASIC’s Moneysmart also recommends obtaining independent advice before agreeing to become a guarantor.

Step 6: Submit the Home Loan Application

Once you prepare the required documents, you can submit the application.

The lender will generally assess:

• Borrower income, expenses and existing debts.
• Credit history and repayment capacity.
• Guarantor financial circumstances.
• Guarantor property value and available equity.
• Proposed guarantee amount and legal documentation.

The lender may request further information or arrange additional property valuations.

Step 7: Loan Approval and Settlement

If you meet the lender’s requirements, the lender may issue formal loan approval.

The borrower and guarantor must complete the required loan and guarantee documents.

Once everyone satisfies the conditions, the loan can proceed to settlement.

After settlement, the borrower makes the regular home loan repayments.

The guarantor remains responsible under the guarantee until the lender formally releases them.

Guarantor Home Loans vs Other First Home Buyer Options

A guarantor arrangement is not the only way to overcome a deposit shortfall.

First home buyers may also qualify for government assistance, low-deposit home loans or other family support arrangements.

The appropriate structure depends on your financial position and the risks you are prepared to accept.

Feature	Guarantor home loan	Standard low-deposit loan	Government guarantee scheme	Family cash gift
Family property used as security	Usually	No	No	No
Smaller deposit possible	Yes	Yes	Yes	Potentially
LMI	May be avoided	May apply	Usually avoided under the scheme	Depends on LVR and lender
Family member’s ongoing financial liability	Yes, until release	No	No	Usually no
Income assessment required	Yes	Yes	Yes	Yes
Eligibility restrictions	Lender-specific	Lender-specific	Government scheme criteria	Lender-specific
Family member needs property equity	Usually	No	No	No

Guarantor Home Loans vs the Australian Government 5% Deposit Scheme

The Australian Government’s First Home Guarantee allows eligible first home buyers to purchase a home with a deposit of as little as 5%.

Under the scheme, the government guarantees part of an eligible home loan.

This can help eligible buyers avoid LMI without requiring a family member to provide property security.

The scheme has eligibility requirements, including property price caps and owner-occupier conditions.

Participating lenders also assess each applicant’s financial circumstances.

A guarantor home loan may offer different deposit options. However, it places additional financial responsibility on the guarantor.

Eligible buyers should compare the requirements, risks and costs of both arrangements.

Guarantor Home Loans vs a Family Cash Gift

A family cash gift involves a relative providing money towards the deposit or purchase costs.

Unlike a guarantee, a genuine gift does not usually create an ongoing obligation secured against the family member’s property.

However, lenders may require evidence that the money represents a genuine gift rather than a repayable loan.

A gift may also reduce the family’s available savings or financial security.

A guarantor arrangement can preserve the family’s cash savings. However, it exposes the guarantor’s property to potential enforcement action.

Conclusion

Guarantor home loans can help first home buyers overcome one of the biggest barriers to buying property: saving a deposit.

An eligible family member can provide property equity as additional security. This may allow you to purchase sooner, borrow with a smaller deposit and potentially avoid LMI.

However, a family guarantee does not increase your income-based borrowing capacity.

You must still demonstrate that you can afford the loan repayments.

The arrangement also creates financial risks for the guarantor. Their property could face enforcement action if the borrower defaults and the guarantor cannot meet their obligations.

Before proceeding, understand the loan structure, guarantee limits and release conditions.

You should also compare the arrangement with government schemes, family gifts and other low-deposit options.

Both the borrower and guarantor should understand the potential benefits, costs and long-term responsibilities before signing the agreement.

Frequently Asked Questions About Guarantor Home Loans