A guarantor loan can help make buying a home more achievable when saving a large deposit is holding you back. For many first home buyers, building enough savings while managing rent and everyday expenses can take years.
This is where support from parents or eligible family members may help. By using some of the equity in their property as additional security, they can support your home purchase without necessarily providing the deposit in cash. However, this arrangement comes with important financial responsibilities for everyone involved. So, what does it actually mean to be a guarantor?
Check My Eligibility
Click the button to schedule an appointment and to discuss your eligibility and finance options.
What Is a Guarantor Loan and Who Can Be a Guarantor?
A guarantor helps support a home loan by allowing some of the equity in their own property to be used as additional security. Parents commonly take on this role, although some lenders may accept other eligible family members depending on their lending criteria.
With a guarantor loan, being a guarantor does not necessarily mean giving the buyer cash for their deposit. Instead, the lender takes security over the property being purchased as well as an agreed portion of the guarantor’s property equity. The guarantee may be limited to a specific amount rather than covering the borrower’s entire debt.
This structure is what generally distinguishes a guarantor home loan from a standard home loan. The borrower remains responsible for making the repayments, while the guarantor provides additional security to support the application.
How Does a Guarantor Loan Help a First Home Buyer?
For a first home buyer, a guarantor loan may make it possible to purchase with a smaller saved deposit. This can be useful for someone who has sufficient income to manage their repayments but is finding it difficult to build a large deposit while paying rent and other living costs.
The additional security may also bring the loan-to-value ratio (LVR) to a level that reduces or avoids Lenders Mortgage Insurance (LMI). Whether this applies will depend on the lender, the value of the properties and how the loan is structured.
Keep in mind that having a guarantor does not remove the usual lending requirements. The borrower still needs to demonstrate that they can afford the loan, while the guarantor must also satisfy the lender’s eligibility criteria.
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.
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.
Why Do First Home Buyers Use Guarantors?
Saving a large enough deposit can be one of the biggest hurdles to home ownership. This can become even more challenging as the amount Australians need to borrow increases. According to the Australian Bureau of Statistics (ABS), the average first home buyer loan reached $607,624 in the December quarter of 2025, following a record 8.5% quarterly increase.
For buyers who can comfortably manage their repayments but have not yet built a substantial deposit, a guarantor loan may help bridge this gap.
Potential benefits include:
- Buying sooner: Family support may reduce the amount you need to save before purchasing.
- Potentially avoiding LMI: Additional security may help reduce the loan-to-value ratio (LVR) used by the lender when structuring the loan.
- Using family equity: Eligible property equity may provide additional security rather than relying entirely on cash savings.
- Starting to build equity: Buying sooner gives you the opportunity to begin building equity in your own property.
However, a guarantor mortgage does not automatically mean you can borrow beyond what you can reasonably afford. Lenders still assess your income, expenses, debts and ability to meet the repayments.
What Are the Risks for Parents Acting as Guarantors?
While a guarantor loan can help someone buy a home sooner, parents need to understand the financial commitment they are making. Becoming a home loan guarantor means allowing part of the equity in your property to be used as security for someone else’s borrowing.
Before agreeing, parents should consider several potential risks:
- Financial responsibility: If the borrower defaults and the lender cannot recover the outstanding debt from the sale of the property, the guarantor may become responsible for the amount covered by their guarantee.
- Risk to property: Depending on the arrangement, the lender may take action against the guarantor to recover an amount owed under the guarantee.
- Future borrowing: Providing a guarantee may affect the parent’s ability to borrow or refinance for their own needs.
- Family pressure: Financial difficulties can place strain on relationships, particularly if circumstances change unexpectedly.
Parents should understand exactly how much they are guaranteeing and the conditions for releasing the guarantee. Getting independent legal and financial advice before committing can help them understand the risks and obligations involved.
When Can a Guarantor Be Released From the Home Loan?
A guarantee does not necessarily need to stay in place for the entire home loan term. As the borrower builds enough equity in their property, they may be able to apply to have the guarantor released from the guarantor loan.
Equity can increase in several ways, including:
- Making principal repayments to reduce the outstanding loan balance
- Property value growth over time
- Making additional repayments where the loan allows it
Releasing the guarantee is not automatic. The lender will generally reassess the loan and may require a new property valuation to determine whether there is sufficient equity. Its loan-to-value ratio (LVR) requirements and other lending criteria may also need to be met.
The exact process for removing someone from a guarantor mortgage varies between lenders. Borrowers should check the release requirements before entering the arrangement so both parties understand how the guarantee could eventually come to an end.
Is Using a Guarantor Right for You and Your Family?
A guarantor loan can help make home ownership more achievable, but both parties need to understand the commitment involved. Consider whether you can comfortably manage the repayments, how much equity will be used and what happens if your circumstances change. Anyone becoming a home loan guarantor should also understand the risks to their own finances and property.
If you are a first home buyer considering this option, getting professional advice can help you understand lender requirements and plan how the guarantee may eventually be released. ZEP Finance can help you compare your options and determine whether this approach is suitable for your circumstances.
FAQs About Guarantor Loan
Potentially. A lender may accept equity in an investment property rather than the family home, but this depends on its lending criteria, the property and the amount of usable equity available. The lender will generally need to value the property before determining whether it is suitable as security.
Being retired does not necessarily prevent a parent from providing a guarantee. However, lenders may consider factors such as the guarantor’s age, financial position, property ownership and ability to understand and manage the risks involved. Lending policies differ, so eligibility needs to be assessed individually.
Yes, depending on the lender and loan structure. A guarantee can often be limited to a specified amount rather than covering the entire debt. This can help limit the guarantor’s exposure, although they remain responsible for the amount covered by the guarantee if it is called upon.
Parents are common guarantors, but they are not always the only option. Some lenders may accept siblings, grandparents or other close family members. Exactly who qualifies varies between lenders, making it important to check eligibility before relying on a particular family member for support.
Potentially, but refinancing can be more complicated when a guarantee remains attached to the existing lending. The new lender will need to assess the borrower and proposed security arrangement. Depending on the borrower’s equity at that point, refinancing may also provide an opportunity to remove the family guarantee altogether.
After studying business and finance at university, Zain initially expected to pursue a career in finance. However, his passion for property and the experience of buying his own home led him to mortgage broking. He began his mortgage brokering career in 2009 and founded ZEP Finance in 2010.
