A guarantor home loan allows a family member — most commonly a parent — to use the equity in their own property to help you borrow without a full deposit. It is one of the most effective tools for getting into the property market earlier and avoiding expensive Lenders Mortgage Insurance.
When a lender approves a loan with a guarantor, they take security over two properties: yours (the one you are buying) and the guarantor's (typically your parents' home). The guarantor does not give you cash — they pledge equity in their property as additional security for the lender.
For example: You want to buy a $700,000 property. You have a $35,000 deposit (5% of purchase price). Normally, borrowing $665,000 against a $700,000 property (LVR 95%) would require you to pay LMI. Instead, your parents guarantee $105,000 (15% of the purchase price) using equity from their home. The lender now has security over your property AND $105,000 of your parents' equity — effectively treating it as an 80% LVR loan against your property, and no LMI is required.
Most lenders today offer limited guarantees (also called security guarantees or family pledges):
Always insist on a limited guarantee. A limited guarantee protects the guarantor from being exposed to your full loan balance. Most lenders offering family guarantee products will default to a limited structure, but verify this explicitly before signing.
The guarantor's risk is real and must not be minimised. If you cannot make repayments and the lender exercises the guarantee, the guarantor must either repay the guaranteed amount or have their property sold to cover the debt. Guarantors should:
The guarantee is not permanent. Once your LVR drops below 80% (typically through a combination of repayments and property value growth), you can apply to the lender to release the guarantor. Most lenders require a formal valuation to confirm the current LVR. The release is not automatic — you must apply for it, and the lender must approve it.
Typical timeline to release: in a rising property market, as little as 2–3 years. In a flat market, 5–7 years depending on your repayments and loan size.
Most major and mid-tier lenders offer some form of family guarantee product:
Products vary in structure and maximum guarantee amounts. A mortgage broker can compare policies to find the most favourable terms for your situation and your guarantor's circumstances.
The guarantor needs enough usable equity to cover the difference between 80% of the purchase price and your actual deposit. Lenders typically allow up to 80% of the guarantor's property value as usable equity (less any existing mortgage on that property).
Example: Parents' home worth $900,000, with a $200,000 mortgage. Usable equity = ($900,000 × 80%) − $200,000 = $520,000. This is more than enough to guarantee the typical first home purchase.
If a family guarantee is not available, consider: