Guarantor Loans Explained: How Parents Can Help You Buy a Home

Buying your own home is a huge milestone, but saving a full 20% deposit plus covering stamp duty, legal costs and other fees can feel like a steep climb. That’s where a guarantor loan can come in: it allows a family member (often a parent) to support your home-loan application by using their own property equity as extra security. In this article I’ll explain how guarantor loans work in Australia, what you and your parents need to consider, and how to reduce risks involved.

What is a guarantor loan?

A guarantor home loan is like a standard home loan but with an added safety net for the lender. A guarantor (usually a parent) provides extra security, typically by offering some equity from their own property, so the lender is less exposed if the borrower can’t meet repayments.

The guarantor doesn’t usually hand over cash. Instead their property serves as collateral. If the borrower defaults, the lender may call on that guarantee to recover the outstanding debt.

In many cases a guarantor doesn’t have to guarantee the entire loan. Some lenders allow a limited guarantee, where only a portion (for example, 10 % or 20 %) is guaranteed. Once the borrower has repaid that portion or reduced the loan enough, the guarantor might be released from further liability.

So, why should you use a guarantor loan?

Enter the property market sooner

One of the biggest advantages is being able to buy a home quicker rather than waiting years to accumulate a large deposit. A guarantor can help bridge that gap.

Avoid or reduce Lenders Mortgage Insurance (LMI)

LMI is usually required if your deposit is less than 20 %. With a guarantor providing extra security, you may avoid or reduce the LMI burden. That can save you thousands.

Increased borrowing power

With a guarantor, some lenders will let you borrow more than you otherwise could, because the risk profile is improved.

This sounds great, but here are some considerations before going ahead:

Equity and property constraints

To act as a guarantor, the person must have sufficient equity in a property. Often, existing mortgages or prior encumbrances are taken into account

In many cases the guarantor’s property must be with the same lender, or the guarantor may need to refinance to that lender before they can offer guarantee.

Some lenders limit how much guarantee a single guarantor can provide (for example no more than 50 % of their security).

Legal and financial risk

A guarantor is legally liable (to the extent of the guarantee) if the borrower fails to make repayments. That means their own property could be at risk.

Because of this, many lenders require the guarantor to obtain an independent legal certificate, ensuring they understand the obligations they are assuming.

Also, acting as a guarantor can affect the guarantor’s ability to borrow for themselves, since the guarantee counts as a contingent liability.

Exit strategies

It’s important to set a clear plan about when and how the guarantor will be released from the guarantee. Common triggers include:

• The loan-to-value ratio (LVR) drops sufficiently (for instance below 80%)

• The borrower makes extra repayments or refinances

Without a strategy, the guarantor may remain exposed longer than intended.

Who can be a guarantor?

Most lenders expect a close and enduring relationship between borrower and guarantor. Immediate family (parents, legal guardian, spouse) are the most common.

Some lenders will allow siblings, grandparents or adult children under certain conditions, provided the relationship is strong and the guarantor has adequate financial standing.

Lenders generally impose requirements on guarantors similar to those for borrowers - good credit history, stable income, and age restrictions (some lenders don’t accept older guarantors or retirees).

Things you both should talk through

• Transparency and expectations: Be open about your budget, income, future plans and what happens if interest rates rise or income falls.

• Document everything: Have a written agreement covering when the guarantee ends, what portion is guaranteed, and how you’ll manage unforeseen events.

• Independent advice: Both parties benefit from legal advice so the risks and responsibilities are fully understood.

• Review regularly: Keep tabs on property values, outstanding debt, and whether the guarantee is still needed or safe to remove.

• Exit timing: Agree early on what benchmarks or conditions will trigger release of guarantor obligations - for the sake of peace of mind.

Conclusion

Guarantor loans can be a powerful tool to help you enter the property market sooner by leveraging the support of a parent or family member. They can help you avoid LMI, borrow more, and move faster.

But they are not without risk: the guarantor takes on serious legal and financial exposure. The key is to go in with eyes wide open, plan exit strategies early, and have open conversations between borrower and guarantor. If structured carefully, a guarantor arrangement can be a win-win in your journey to home ownership.

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