A guarantor loan allows a parent or close family member to use their property equity to guarantee part of your home loan. This lets you borrow without a full deposit, avoid LMI, and enter the market sooner. GeeVee explains exactly how it works, the risks for guarantors, and whether it is right for your situation.
How a Guarantor Loan Works
Instead of saving a 20% deposit ($140k on a $700k purchase), your parents offer their property as additional security. The lender takes a limited guarantee (typically 20-25% of the purchase price) over your parents’ property. You borrow 100% of the purchase price. You pay no LMI (saving $15k-$30k). Your parents are not on the mortgage — they do not make repayments — but their property is at risk if you default.
Guarantor Loan Structure (Example)
| Scenario | Standard 95% Loan | Guarantor Loan |
|---|---|---|
| Purchase price | $700,000 | $700,000 |
| Deposit required | $35,000 (5%) | $0 |
| LMI cost | $18,500 | $0 |
| Parents’ equity at risk | None | $175,000 (25% guarantee) |
| When guarantee releases | N/A | When LVR reaches 80% (typically 3-5 years) |
Risks for Guarantors
- If you default, the lender can pursue the guarantor’s property
- The guarantee appears on the guarantor’s credit file — may limit their own borrowing capacity
- Family conflict risk if repayments become difficult
- Guarantors should get independent legal and financial advice before signing
When a Guarantor Loan Makes Sense
- You have stable income but haven’t saved a full deposit
- You want to avoid paying $15k-$30k in LMI
- Your parents have significant equity (over 50% LVR on their own home)
- You have a clear plan to release the guarantee within 5 years
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