Guarantor loans allow a family member to use the equity in their own home to help a buyer secure a mortgage without a full deposit, often avoiding Lenders Mortgage Insurance entirely. For many Australians priced out of the market, this arrangement is the most practical path to home ownership available today.

With property prices continuing to rise across Melbourne and other capital cities, saving a traditional 20% deposit has become a years-long challenge for first-time buyers. According to CoreLogic data from early 2026, the median dwelling value in Melbourne sits above $780,000, meaning a 20% deposit alone requires more than $156,000 in savings before a single dollar of stamp duty or conveyancing is considered. A family guarantee cuts through that barrier by substituting a portion of the deposit requirement with equity from a parent or close relative’s property.

This guide explains exactly how guarantor loans work, what every guarantor needs to understand before signing, and how the guarantee is eventually removed so the family member gets their security back.

How Does a Guarantor Loan Actually Work?

A guarantor loan is a standard home loan with one important addition: a third party (usually a parent) offers their property as additional security for part of the borrowing. The lender registers a mortgage over both properties. This structure means the buyer can borrow up to 100% of the purchase price and sometimes cover purchase costs as well, without paying Lenders Mortgage Insurance (LMI).

The Two-Loan Structure

Most lenders split the borrowing into two portions:

• Loan 1 (primary loan): Typically 80% of the property’s purchase price, secured against the buyer’s new property.
• Loan 2 (guaranteed loan): The remaining amount (often 20% or less), secured against the guarantor’s property.

The guarantor is only liable for the second, smaller loan portion, not the entire mortgage. This is called a limited guarantee, and it is the structure most Australian lenders now offer by default. According to the Australian Banking Association, limited guarantees have become standard practice precisely because they reduce the financial exposure of the guarantor to a defined, capped amount.

Who Qualifies as a Guarantor?

Lenders generally require the guarantor to be an immediate family member, most commonly a parent or step-parent. Some lenders extend eligibility to siblings or grandparents. The guarantor must:

• Own a property in Australia with sufficient equity (typically at least 20% free equity in their home)
• Meet the lender’s own serviceability and credit checks
• Receive independent legal and financial advice before signing

For a deeper breakdown of how the structure applies across different buyer types, the team at Collings Real Estate has put together a detailed resource on guarantor loans for property in Australia that covers lender-specific criteria and common eligibility questions.

What Are the Real Risks to the Guarantor?

This is the question every parent must answer honestly before agreeing to act as a guarantor. The short answer: if the borrower defaults and the lender cannot recover the full debt from selling the buyer’s property, the guarantor’s property can be used to recover the shortfall. This is not a theoretical risk. The Australian Securities and Investments Commission (ASIC) specifically warns on its MoneySmart platform that guarantors can lose their home if the borrower cannot meet repayments.

Key Risks to Understand

1. Property seizure: The lender holds a registered mortgage over the guarantor’s home for the guaranteed portion. In a default scenario, they can sell that property.
2. Impact on borrowing capacity: The guarantee appears as a contingent liability on the guarantor’s credit file, which can reduce their own ability to refinance or borrow in the future.
3. Relationship strain: Financial entanglement between family members carries emotional risk that is harder to quantify but equally real.
4. Duration uncertainty: If the buyer’s property does not grow in value as expected, the guarantee may remain in place longer than anticipated.

Lenders are required by the National Consumer Credit Protection Act 2009 to ensure guarantors receive independent legal advice before the guarantee is signed. This step is non-negotiable and exists specifically to protect family members from entering an arrangement they do not fully understand.

Mitigating the Risks

The best way to manage guarantor risk is through clear planning from day one. Both parties should agree on:

• A target timeline for removing the guarantee (typically 2 to 5 years)
• A plan for the buyer to make extra repayments to build equity faster
• What happens if the buyer’s circumstances change (job loss, relationship breakdown, etc.)

Investors considering using a family guarantee to grow a portfolio should also read our guide to guarantor loans for property investment, which covers how the structure changes when the purchase is an investment rather than an owner-occupied home.

How Does the Guarantee Get Removed?

The guarantee is not permanent. It is removed once the buyer has built sufficient equity in their property so that the lender no longer needs the additional security. In practice, this means achieving a loan-to-value ratio (LVR) of 80% or below on the primary loan alone.

The Two Pathways to Release

There are two ways this typically happens:

1. Capital growth: The buyer’s property rises in value, pushing the LVR below 80% naturally. CoreLogic’s 2025 annual report showed Melbourne properties delivered average annual growth of approximately 4.2% over the preceding decade, meaning a well-located property can reach the release threshold faster than many buyers expect.
2. Extra repayments: The buyer pays down the loan principal aggressively. Even an additional $200 per week on a $600,000 loan can cut years off the time needed to reach the 80% LVR threshold and save tens of thousands in interest.

Once the LVR target is met, the buyer applies to the lender for a guarantee release. The lender re-values the property, confirms the equity position, and if satisfied, discharges the mortgage registered over the guarantor’s home. The guarantor’s property is then free and clear of any obligation.

Can You Refinance to Remove the Guarantee?

Yes. If the buyer cannot reach 80% LVR through growth or repayments alone, they may be able to refinance to a new lender at the lower LVR using only the primary property as security, provided the gap is small enough that LMI (or the First Home Guarantee scheme) covers the difference. This is worth exploring with a broker before assuming the guarantee must remain in place longer.

Is a Guarantor Loan Better Than Other Low-Deposit Options?

Guarantor loans are one of several strategies available to buyers who cannot reach a 20% deposit. The right choice depends on individual circumstances, but a quick comparison helps frame the decision.

Guarantor Loan vs. Lenders Mortgage Insurance (LMI)

LMI is an insurance policy that protects the lender (not the buyer) when the LVR exceeds 80%. On a $780,000 Melbourne property with a 10% deposit, LMI premiums can reach $15,000 to $25,000 according to Genworth Financial estimates, and that cost is typically capitalised onto the loan, adding to total interest paid. A guarantor loan sidesteps LMI entirely, which is a significant financial saving.

Guarantor Loan vs. Government Schemes

The Federal Government’s First Home Guarantee allows eligible buyers to purchase with a 5% deposit and no LMI, with the government acting as a partial guarantor. However, places are capped each financial year and income and price limits apply. A family guarantee has no such caps, making it available to a broader range of buyers, including those purchasing above scheme price thresholds.

Points to Consider Before Choosing

• Does your family member have sufficient free equity and stable finances of their own?
• Are both parties genuinely comfortable with the arrangement and its risks?
• Have you modelled how long the guarantee is likely to remain in place?
• Have you compared the total cost against paying LMI outright?

Understanding all your financing options is essential before committing. Our overview of buying vs renting in Australia in 2026 provides useful context on whether purchasing now (with a guarantee) makes financial sense compared to continuing to rent while you save.

What Steps Should You Take Before Applying?

Getting a guarantor loan approved is not simply a matter of having a willing family member. Preparation on both sides is essential.

For the Buyer

• Check your credit score and address any issues before applying (free annual checks are available via Equifax, Experian and illion)
• Demonstrate genuine savings history, even if the total is below 20%
• Get pre-approval so you know your borrowing capacity before inspecting properties
• Work with a licensed mortgage broker who has experience structuring family guarantees

For the Guarantor

• Obtain an up-to-date valuation of your own property to confirm available equity
• Seek independent legal advice, which lenders will require regardless
• Speak to a financial adviser about the impact on your own retirement planning or future borrowing needs
• Review your own home and contents insurance to ensure it remains adequate throughout the guarantee period

Both parties should also understand that the lender will assess the guarantor’s financial position independently. A guarantor who carries significant existing debt, has an unstable income, or whose property has limited equity may not be accepted by the lender even if the buyer is otherwise credit-worthy.

Conclusion

Guarantor loans are a genuinely powerful tool for buyers who have the income to service a mortgage but lack the deposit to cross the lending threshold without LMI. When structured correctly with a limited guarantee, independent advice for all parties, and a clear plan for release, they allow families to help each other build wealth without taking on open-ended financial exposure. The key is going in with eyes wide open: understanding the risks, agreeing on the timeline, and treating the guarantee as a short-term bridge rather than a permanent arrangement. If you are exploring this path, speaking with an experienced real estate and finance professional is the best first step you can take.