Guarantor Home Loan : How Parental Guarantee Can Help You Buy Your First Home

Do you know what a guarantor home loan is? Do you think you need one? If you want to know what it is and what it can do for you, then read on.

Are you a first home buyer struggling to save up a decent deposit? You’ve switched to op shops, you cancelled your gym membership, and it’s been 6 months since you enjoyed an avocado-on-toast brunch at your local café. Despite this, you still feel like you’re light years away from saving a 20% house deposit. If this describes your current situation, you’re not alone.

In 2025, saving a 20% deposit for a typical home still feels out of reach for many first home buyers. According to a recent report, it now takes an average of 10.6 years to save that deposit, even when setting aside 15% of income annually. With housing prices continuing to climb, more buyers are turning to options like guarantor home loans to enter the market sooner without the wait.

What Is a Guarantor?

A guarantor is a person who offers some of their property equity as a guarantee on the borrower’s mortgage. Essentially, they’re helping the borrower buy a home with the help of their own equity to support the loan they are taking out for their home purchase. In a sense, they are offering their own property as collateral. 

A guarantor could be your parents (known as a parental guarantee), family, spouse or anyone deemed eligible as per the lender’s criteria. The equity in their property can then serve as your deposit and security.

What Is a Guarantor Home Loan ?

A guarantor loan is a mortgage product offered to borrowers who have less than 20% of the purchase price saved as a deposit. The guarantor acts as a third party who agrees to pay back the mortgage should the borrower default or become unable to pay. 

Because the guarantors’ security is used to support the loan there is less financial risk for the lender so they approve without Lenders Mortgage Insurance (LMI), helping borrowers save thousands. In recent years, guarantor loans have gained significant traction — Daily Telegraph reports that the share of first-home buyers using guarantor support nearly tripled, jumping from 1.8% to 5% in 2023 alone.

How Does a Guarantor Loan Work?

With a guarantor home loan, the borrower is still responsible for making all monthly repayments. However, a guarantor, as mentioned earlier, provides additional security for the loan by using the equity in their own property to cover part of the deposit.

In most cases, this is a limited guarantee, meaning the guarantor is only liable for the portion of the loan that exceeds 80% of the property value. This helps the borrower avoid Lenders Mortgage Insurance (LMI), which is usually required when borrowing more than 80%.

For example: you’ve saved a 10% deposit, but your lender requires a 20% deposit to waive LMI. If your parents own their home and have built up equity, they can offer a guarantee limited to the remaining 10%. This limited guarantee bridges the gap, allowing you to meet the lender’s 20% requirement without paying LMI.

It’s important to remember that if you’re unable to meet your repayments and the property is sold at a loss, your guarantor may be responsible for the guaranteed portion – not the entire loan.

Who Can Be a Guarantor for a Home Loan?

Who you can use as your home loan guarantor will vary depending on the lender. While most lenders allow for immediate family members (i.e., parents and spouse), others may also accept extended family members. 

This could include in-laws, grandparents, siblings and even an ex-spouse, as long as they fit the lender’s criteria. In some cases, a close friend may also be considered as a suitable guarantor.

What Are the Most Common Guarantor Mortgage Arrangements?

In Australia, the most common – and currently the only – type of guarantor loan is a security guarantee, typically provided by a close family member such as a parent.

Here’s how it works:

• The guarantor offers part of the equity in their property as security for your loan. This helps reduce your loan-to-value ratio (LVR) to 80% or less, allowing you to avoid Lenders Mortgage Insurance (LMI).
• All security guarantees in Australia are limited guarantees. That means the guarantor is only liable for the portion of the loan above 80% of the property value – not the full loan amount.
• If you default and the lender incurs a loss, the guarantor may be required to cover that limited amount, but only within the agreed guarantee.
  
  

Note that guarantors cannot contribute cash toward your deposit under the guarantor arrangement. If a family member wants to help with cash, that would be treated separately as a gift or non-repayable contribution, subject to different lending policies.

What Risks Do Guarantors Face?

Family guarantor home loans can be a great tool for first-home buyers — but being a guarantor for a home loan comes with serious responsibilities. Here are the key risks every potential guarantor should understand:

1. Reduced Borrowing Capacity

Lenders may count the guarantee as a liability, limiting your ability to borrow for your own needs like buying property, cars, or investments.

2. Financial Liability if the Borrower Defaults

If the borrower can’t make repayments, you may be legally required to cover the debt — including selling your own assets if necessary.

3. Legal Risks and Credit Impact

Contrary to popular belief, missed payments or defaults by the borrower cannot negatively affect the guarantor’s credit score. This is because guarantor loans are not on the guarantor’s credit file.

4. Property Sale or Refinance Restrictions

A lender may place a mortgage or caveat on your property, which can delay or prevent you from selling or refinancing until the guarantee is released.

5. Relationship Strain

Money matters can cause tension. A default or financial disagreement could damage personal or family relationships.

6. Independent Legal & Financial Advice

Most lenders require guarantors to seek legal and financial advice to ensure they fully understand the guarantor home loan requirements and risks.

What are the Benefits of Guarantor Loans?

There are some fantastic benefits for first home buyers who are eligible for a guarantor mortgage, such as:

1. You won’t have to save up such a large deposit.
2. Avoid paying Lenders Mortgage Insurance (LMI).
3. Improve your borrowing capacity.
4. Flexible guarantor arrangements to suit the needs of the borrower and guarantor.

However, as with any major financial decision, it’s important to carefully weigh up the pros and cons. The best way to do this is by consulting with an experienced mortgage broker.

What are the Eligibility Criteria for a Guarantor Loan?

Most lenders will only accept family members as guarantors on a home loan. Additionally, your chosen guarantor must comply with the guarantor mortgage requirements in Australia. This typically means they will need:

• To be between 18-65 years old.
• Have a good credit score.
• Own property in Australia.
• Have sufficient equity in their property.
• Have a stable income.
• Be a citizen or permanent resident of Australia.

If a guarantor has a low credit score or can’t demonstrate a stable income, they could have their application rejected, despite having sufficient equity. This is just one of the reasons why it’s a good idea to talk to a broker before approaching a lender about a guarantor loan.  

How Long Does a Guarantor Stay on a Mortgage?

In most guarantor home loans, the guarantee is limited to the portion of the loan that exceeds 80% of the property’s value. This means the guarantor is only liable for that specific portion – not the entire loan. They are not co-borrowers, and their name does not appear on the property title.

There is no fixed timeframe for how long a guarantor remains on a loan. However, in many cases, the guarantor can be released within 1 to 5 years. This depends on how quickly the borrower pays down the loan or how much the property increases in value. Once the Loan to Value Ratio (LVR) drops below 80% – through a combination of repayments and/or capital growth – the lender may agree to release the guarantor from the agreement.

Some borrowers also choose to refinance their home loan once their equity reaches 20% or more. At this point, the new loan can be structured without a guarantor, and the original guarantee is removed.

Are There Alternative Ways Parents Can Assist?

Besides acting as a guarantor, there are other ways that parents can assist their adult children with buying their first home, such as:

• Gifting money which can be used as a deposit.
• Offering a cash loan.
• Allowing them to live in the family home rent-free while they save for a deposit.
• Purchasing and co-owning a property together.

Here’s more information about Guarantor Loans from a mortgage expert: