Guarantor Home Loans: How a Family Guarantee Works

Saving a deposit is the hardest part of buying a first home, and for a lot of people it's the only part standing between them and the market. A guarantor home loan is one of the ways around it. Instead of waiting years to save a 20% deposit, you borrow against a family member's equity to get in sooner.

It's a genuinely useful tool, but it also puts someone else's home on the line, so it pays to understand exactly how it works before anyone signs anything. Here's the full picture.

What a guarantor loan actually is

A guarantor loan lets a family member, almost always a parent, use the equity in their own property as extra security for your home loan. The bank gets more security, so it's willing to lend you more of the purchase price, often the full amount plus costs.

The immediate benefit is that you can buy with little or no deposit of your own, and you avoid Lenders Mortgage Insurance, which on a purchase can run anywhere from $15,000 to $35,000 or more.

Importantly, the guarantor doesn't hand over any cash. They're pledging a slice of their property's equity as backup, not writing a cheque. As long as you meet your repayments, nothing happens to their home at all.

The limited guarantee is the key detail

This is the part that gets lost in a lot of kitchen table conversations, so it's worth being precise.

A well structured guarantor loan uses a limited guarantee. That means the guarantor is only on the hook for a specific, capped portion of your loan, not the entire thing.

A worked example

Say you're buying a $600,000 home and you've saved nothing meaningful toward a deposit. To avoid LMI, the lender wants security equal to 20% of the price plus a buffer for costs. So the guarantee might be set at around $120,000 (the 20% deposit equivalent) plus roughly $30,000 to cover stamp duty and buying costs, for a limited guarantee of about $150,000.

Your parents' property secures that $150,000 portion. You borrow the full $600,000 plus costs. If everything goes to plan, they are never liable for a cent beyond that capped amount, and their exposure shrinks as your loan reduces.

The alternative, an unlimited guarantee over the whole loan, is something we'd almost never recommend and most good lenders don't push. Always structure it as a limited guarantee.

Security guarantee versus servicing guarantee

There are two different things people mean when they say "guarantor", and they carry very different weight.

A security guarantee is the common one described above. The guarantor provides property security only. Their income isn't assessed, and you still need to prove you can service the loan on your own.

A servicing guarantee is where the guarantor's income is also used to help you qualify. This is far less common, harder to arrange, and exposes the guarantor to much more. Most first home buyer guarantor loans are security guarantees, and that's usually the sensible structure.

Who can be a guarantor

Lenders have rules about this, and they vary. Generally a guarantor needs to be:

• An immediate family member, most often a parent. Some lenders allow siblings or grandparents, many don't.

• The owner of a property with enough usable equity to cover the guaranteed amount.

• In a sound enough financial position that taking on the guarantee is reasonable.

A guarantor with an existing mortgage of their own can still help, provided there's enough equity behind it. Their lender's consent and the numbers both need to stack up, which is exactly the kind of thing we check before anyone gets their hopes up.

The risks the guarantor is taking on

This is not a formality, and it shouldn't be treated like one. If you default and the lender can't recover the debt from your property, they can pursue the guaranteed portion against your guarantor's home. In a worst case, that can mean the guarantor having to sell or refinance to cover it.

That's why lenders require the guarantor to get independent legal advice before proceeding. A solicitor sits down with them, separately from you, and makes sure they understand what they're agreeing to. It can feel like a hoop to jump through, but it exists for good reason, and we'd encourage every guarantor to take it seriously rather than rush it.

Anyone considering guaranteeing a loan should also talk to their own solicitor and accountant about how it might affect their situation, including any future plans to sell or borrow against their own home.

How you release the guarantee

A guarantee isn't meant to last forever. The goal is to remove it as soon as you reasonably can, and there are two ways your loan gets to that point.

The first is simply paying the loan down. The second, and often faster, is capital growth lifting the value of your property.

Another worked example

Back to that $600,000 purchase. You borrowed the full amount, so your starting loan is around $600,000 against a $600,000 property.

To release the guarantee, most lenders want your loan to sit at or below 80% of your property's value, so you're no longer relying on the guarantor to avoid LMI.

Say a few years pass. You've chipped the loan down to $550,000, and the property has grown in value to $700,000. Your loan is now about 79% of the value. At that point you can apply to have the guarantee removed, your parents' property is released entirely, and you carry the loan on your own.

We generally build a rough plan for this from day one, so everyone involved knows roughly when the guarantee is likely to come off.

Guarantor loan or the 5% Deposit Scheme?

It's worth knowing that fewer first home buyers need a guarantor than they used to. Since October 2025, the Australian Government's 5% Deposit Scheme has had its income caps and place limits removed, so many first home buyers can now buy with a 5% deposit and no LMI, as long as the property sits under the price cap for their area. In Melbourne that cap is around $950,000, current at the time of writing.

So which is better? It depends. The scheme is often the simpler path if you qualify and you're buying under the cap, because no family member has to put their home up. A guarantor can still be the better route if you're buying above the scheme's price cap, if you don't meet the eligibility rules, or if you want to borrow with an even smaller deposit of your own. Sometimes the two even work together.

There's no single right answer, and this is precisely the kind of thing worth talking through properly rather than guessing.

Where to from here

A guarantor loan can bring your first home forward by years, but it's a decision that involves your family's home as well as yours, so it deserves a proper conversation rather than a rushed one.

Get in touch with the team at Claremont Financial and we'll walk you and your potential guarantor through how it would actually work for your situation, structure the guarantee sensibly, and map out how and when it comes off. Bring your family in on the chat too, so everyone understands the plan from the start.

Scheme caps, LMI costs, and lender policies mentioned here are current as at the date of publishing and can change.

Disclaimer: This is general information only and does not constitute financial advice. Your situation is unique, so chat with the team at Claremont Financial to get guidance tailored to you.