How to Use a Guarantor to Buy a Home in Australia: A Complete Guide for First-Time Buyers

Saving for a home deposit is one of the biggest hurdles for first-time buyers in Australia. With property prices remaining high, many aspiring homeowners find themselves locked out of the market despite having a stable income. A guarantor home loan offers a pathway to homeownership by allowing a family member to use their own property as security, reducing or even eliminating the need for a deposit. This guide explains how guarantor loans work, who can be a guarantor, the benefits and risks, and the alternatives available in 2025.


What Is a Guarantor Home Loan?

A guarantor home loan, often called a family pledge loan, is a mortgage where a third party—usually a close relative—provides additional security to help the borrower secure finance. The guarantor uses the equity in their own property as collateral, which reduces the lender’s risk. This arrangement can help borrowers avoid paying Lenders Mortgage Insurance (LMI) and potentially borrow up to 100% of the property’s purchase price, or even more to cover costs like stamp duty.

In Australia, guarantor loans are particularly popular among first-home buyers who have a steady income but struggle to save a 20% deposit. According to the Australian Bureau of Statistics (2024), the average loan size for first-home buyers reached $539,000, while the median house price in capital cities exceeded $900,000. With a typical 20% deposit requirement of $180,000, many turn to family support.

How Does a Guarantor Home Loan Work?

The structure of a guarantor loan typically involves two loans or a single loan with two securities:

1. The primary loan – secured against the property being purchased.
2. The guarantee – secured against the guarantor’s property, usually limited to a specific amount (e.g., 20% of the purchase price).

For example, if you’re buying a $600,000 home and have saved $30,000 (5%), a guarantor could provide a limited guarantee of $90,000 (15% of the purchase price) using equity in their home. This brings the total security to 20%, avoiding LMI. The guarantee is not a cash gift; it’s a legal commitment that the guarantor’s property can be sold if you default.

Eligibility Requirements for Guarantor Home Loans

Lenders have strict criteria for both borrowers and guarantors. As of 2025, the key requirements include:

For Borrowers

• Stable income: You must demonstrate the ability to service the loan. Lenders assess your employment history, salary, and other debts.
• Good credit history: A clean credit report is essential. Recent defaults or bankruptcy will disqualify you.
• Genuine savings: While a deposit may not be required, many lenders want to see that you’ve saved at least 5% of the purchase price to show financial discipline.
• Australian residency: Most lenders require you to be an Australian citizen or permanent resident.

For Guarantors

• Close relationship: Guarantors are typically parents, but some lenders accept siblings, grandparents, or even adult children. Friends are rarely accepted.
• Sufficient equity: The guarantor’s property must have enough equity to cover the guarantee amount. Lenders usually require the guarantor to own their home outright or have a low loan-to-value ratio (LVR).
• Age and income: Guarantors are often under 65 and must show they can service their own debts. Retirees may be accepted if they have substantial assets or income.
• Independent legal advice: Guarantors must receive independent legal advice before signing, to ensure they understand the risks.

Property Requirements

• The guarantor’s property must be in an acceptable location (typically metropolitan or major regional areas).
• Some lenders restrict the type of property; for example, rural properties or units in high-density areas may be excluded.
• The property being purchased must also meet lender standards.

Benefits of Using a Guarantor

Guarantor loans offer several advantages for first-time buyers:

• No LMI: By avoiding Lenders Mortgage Insurance, you can save thousands of dollars. LMI on a $500,000 loan with a 10% deposit can exceed $10,000.
• Faster entry into the market: You can buy sooner without waiting years to save a full deposit.
• Potentially better interest rates: Some lenders offer competitive rates for guarantor loans, similar to standard loans with a 20% deposit.
• Access to higher loan amounts: With a guarantor, you may borrow up to 100% of the property value, and sometimes more to cover purchase costs.

Risks and Considerations

While guarantor loans can be a great tool, they come with significant risks:

• Guarantor’s property at risk: If you default, the lender can force the sale of the guarantor’s home to recover the debt. This can strain family relationships.
• Limited future borrowing: The guarantee ties up the guarantor’s equity, which may affect their ability to borrow for their own needs.
• Financial strain on borrower: Borrowing a high percentage of the property value means larger repayments and less equity cushion if property values fall.
• Complexity: These loans involve more legal and administrative steps, and not all lenders offer them.

Mitigating the Risks

To protect both parties, consider these strategies:

• Limited guarantee: Most modern guarantor loans use a limited guarantee, meaning the guarantor’s liability is capped at a specific dollar amount, not the entire loan.
• Exit strategy: Plan to remove the guarantor once you’ve built enough equity. This typically occurs when your LVR drops below 80%, often through a combination of repayments and property value growth.
• Insurance: Some borrowers take out income protection or life insurance to cover repayments in case of unexpected events.

Step-by-Step Process to Apply for a Guarantor Home Loan

Applying for a guarantor loan involves several steps:

1. Assess your financial situation: Use online calculators to estimate borrowing power and repayments. Check your credit score.
2. Discuss with potential guarantor: Have an open conversation about the risks and responsibilities. Ensure they are willing and able to help.
3. Research lenders: Not all lenders offer guarantor loans. Compare products from major banks and specialist lenders. Look for features like limited guarantees and flexible exit options.
4. Get pre-approval: Submit a joint application with your guarantor. The lender will assess both parties’ financial positions.
5. Obtain legal advice: The guarantor must see a solicitor independently to sign a guarantee agreement.
6. Property valuation: The lender will value both the property you’re buying and the guarantor’s property.
7. Loan approval and settlement: Once approved, the loan proceeds to settlement like any other mortgage.
8. Monitor equity and release guarantor: After a few years, when your LVR is low enough, apply to release the guarantee.

Alternatives to a Guarantor Home Loan

If a guarantor isn’t an option, consider these alternatives:

Government Schemes

• First Home Guarantee (FHBG): The Australian Government’s Home Guarantee Scheme allows eligible first-home buyers to purchase with a 5% deposit without paying LMI. In 2024-2025, 35,000 places are available annually.
• Family Home Guarantee: For single parents, this scheme requires only a 2% deposit.
• First Home Super Saver Scheme (FHSSS): You can withdraw voluntary super contributions to use as a deposit.

Low Deposit Loans with LMI

Some lenders offer loans with deposits as low as 5%, though you’ll pay LMI. This can be added to the loan amount, but it increases overall costs.

Shared Equity Schemes

State governments and private companies offer shared equity arrangements where you co-purchase with a partner who contributes part of the deposit in exchange for a share of future capital gains.

Gifting or Loaning a Deposit

Family members may gift or lend money for a deposit. A formal loan agreement is essential to satisfy lender requirements.

Comparison of Home Buying Options

Option	Minimum Deposit	LMI Required	Guarantor Needed	Key Feature
Standard Loan (20% deposit)	20%	No	No	Lowest risk, best rates
Guarantor Loan	0-5%	No	Yes	Uses family equity
First Home Guarantee (FHBG)	5%	No	No	Government-backed
Low Deposit Loan with LMI	5-10%	Yes	No	Higher cost
Shared Equity	Varies	No	No	Co-investor shares gains

Data sourced from lender websites and government announcements, accurate as of April 2025.

FAQ

Who can be a guarantor for a home loan in Australia?

Typically, a guarantor must be a close family member such as a parent, sibling, or grandparent. They must own property with sufficient equity, have a good credit history, and receive independent legal advice. Some lenders may accept other relatives, but friends are rarely allowed.

How long does a guarantor stay on the loan?

The guarantee can usually be removed once the borrower’s loan-to-value ratio falls below 80%, often through a combination of repayments and property value growth. This typically takes 2 to 5 years, but it depends on market conditions. You’ll need to apply to the lender for a release.

What happens if the borrower defaults on a guarantor loan?

If the borrower cannot make repayments, the lender may first attempt to recover funds from the borrower’s property. If that’s insufficient, they can pursue the guarantor’s property up to the limited guarantee amount. The guarantor’s credit rating may also be affected, and legal action could follow.

Is a guarantor loan a good idea for first-time buyers?

It can be an excellent way to enter the property market sooner and avoid LMI, but it carries risks for both parties. It’s crucial to have a clear repayment plan and an exit strategy to release the guarantor. Always seek financial and legal advice before proceeding.

References

1. Australian Bureau of Statistics, “Lending Indicators, February 2025,” released 1 April 2025. https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release
2. Australian Government, “Home Guarantee Scheme,” updated 2025. https://www.nhfic.gov.au/what-we-do/home-guarantee-scheme/
3. Australian Securities and Investments Commission, “Home loans: Guarantors,” MoneySmart, 2024. https://moneysmart.gov.au/home-loans/guarantors
4. Commonwealth Bank of Australia, “Family Support Guarantee,” 2025. https://www.commbank.com.au/home-loans/family-support-guarantee.html
5. Westpac, “Family Guarantee Home Loan,” 2025. https://www.westpac.com.au/personal-banking/home-loans/family-guarantee/