Guide · First home buyers
Guarantor Home Loans Explained: How Family Can Help You Buy
A guarantor loan is how a lot of first home buyers get in years earlier than they otherwise could. A parent uses the equity in their home as extra security, and suddenly a small deposit is enough. It's generous, and it's powerful, but it's a serious commitment for the person helping. Here's the full picture.
With a guarantor loan, a family member, almost always a parent, offers the equity in their own property as additional security for your loan. It doesn't mean they hand over cash. It means the lender takes a limited guarantee against their home to cover the gap between your deposit and the 20 percent you'd normally need. That extra security is what lets you borrow with a small deposit, and often with no Lenders Mortgage Insurance.
What it lets you do
- Buy with a smaller deposit. With a guarantor, some buyers can borrow the full purchase price plus costs, though a small deposit or savings history still helps.
- Avoid LMI. Because the guarantee lifts your effective security above 80 percent, you can often skip the LMI premium entirely, which can save many thousands. I break the premium down in the LMI guide.
- Get in sooner. In a rising market, buying two or three years earlier can matter more than the size of your deposit.
It's a limited guarantee, not the whole loan
A good guarantee is limited to a specific amount, usually just the portion needed to get you to 20 percent security, not your entire loan. So if your parents guarantee, say, $120,000 of a $700,000 loan, that's the extent of what they're on the hook for. Getting this limit set correctly is one of the most important parts of the setup.
The risks for the guarantor
I never gloss over this part, because the guarantor is taking a real risk out of love, and they deserve to understand it. If you can't repay the loan and things go badly wrong, the lender can call on the guarantee, which could mean the guarantor has to cover the guaranteed amount, potentially against their own home. It's rare, but it's real, and it's why lenders require guarantors to get independent legal advice before signing. That's a protection, not a formality.
Have the honest conversation first
Before anyone signs, the whole family should be clear on what's being guaranteed, what would happen if repayments were missed, and how and when the guarantee comes off. The good news is the guarantee is usually temporary: once you've paid the loan down or the property has grown enough that you hold 20 percent on your own, the guarantee can typically be released.
Getting the guarantee released
The aim from day one should be to release the guarantor as soon as it's sensible. That happens when your loan drops below 80 percent of your property's value, either through repayments, the property rising in value, or both. At that point we apply to remove the guarantee, and your parents are fully off the hook while you carry on with an ordinary loan. Planning for that release from the start is part of doing this properly, and it's a key thing I help first home buyers map out.
Guarantor loans sit alongside the government schemes as one of the main ways into a first home with a small deposit. Sometimes a guarantee is the right tool, sometimes a government guarantee scheme does the job without involving your parents at all. Working out which fits your situation is worth a proper conversation.
Thinking about a guarantor loan?
I'll walk you and your parents through exactly how it works, what's at risk, and how the guarantee comes off later.
Frequently asked questions
Who can be a guarantor on a home loan?
Usually a parent, and in some cases another close family member, who owns property with enough equity to provide the security. Lenders have their own rules about who qualifies and often require the guarantor to have a stable financial position. Every guarantor must get independent legal advice before signing, which protects them and makes sure they understand the commitment.
Can the guarantor be removed later?
Yes, and that's usually the goal. Once your loan falls below about 80 percent of your property's value, through repayments, growth in the property, or both, you can apply to release the guarantee. Your guarantor then has no further obligation and you continue with a standard loan. Planning for that release from the start is part of setting it up well.
Does a guarantor loan help me avoid LMI?
Often, yes. Because the guarantee lifts your effective security above the 20 percent mark, many guarantor loans avoid Lenders Mortgage Insurance altogether, which can save a significant sum. Whether it applies depends on the lender and how the guarantee is structured, so it's worth confirming for your situation.
Important information
This information is general in nature and does not take your personal objectives, financial situation, or needs into account. It is not credit assistance or a recommendation to enter into any particular credit contract. Consider whether it is right for you and seek advice before acting. Lending is subject to a lender's eligibility and approval criteria. Terms, conditions, fees, and charges apply.
Greenwood Finance · ABN 23 671 049 693 · Credit Representative No. 551942.
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