Guarantor Loans Explained Australia | How They Work & Risks

By AusTaxTools Editorial Team ·

Short answer

A guarantor loan lets a family member (usually a parent) use equity in their own property to guarantee part of your home loan. This can help you avoid Lenders Mortgage Insurance and buy with a smaller deposit — sometimes with no deposit at all. The trade-off is real: the guarantor's property is at risk if you default. Most guarantor arrangements are designed to be temporary, with the guarantee released once the borrower builds sufficient equity.

How it works

The lender splits the loan into two portions: the main loan secured against the new property, and a smaller guarantee portion secured against the guarantor's property. The guarantor does not provide cash — they provide security. This structure avoids LMI and can allow borrowing up to 100% or more of the purchase price.

Limited vs unlimited

A limited guarantee caps the guarantor's liability to a specific dollar amount — typically enough to bring the LVR below 80%. An unlimited guarantee makes the guarantor liable for the entire loan. Always insist on a limited guarantee to protect the guarantor from worst-case exposure.

Exit strategy

The guarantee should be temporary. Once the property value increases or the borrower pays down enough principal to reach 80% LVR, the guarantee can be released. Plan for this from day one — agree on a timeline and track progress with regular valuations.

Common mistakes

  • Guarantors not getting independent legal and financial advice before signing — this is a legal requirement in most states for good reason.
  • Not setting a clear exit timeline — without a plan, the guarantee can remain in place for years, limiting the guarantor's own financial flexibility.
  • Borrowing the maximum possible just because a guarantor allows it — the borrower still needs to service the entire loan from their own income.
  • Assuming the guarantor's property is safe because the borrower is "reliable" — job loss, illness, or relationship breakdown can change circumstances unexpectedly.

Borrowing power calculator

Check how much you can borrow on your income — with or without a guarantor.

First home buyer calculator

Model your full buying costs including LMI savings from a guarantor arrangement.

Plan the exit from day one

A guarantor gets you in the door — have a plan to release them.

Model your first home purchase scenario to see how a guarantor affects your deposit requirements and LMI costs.

First home buyer calculator

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Frequently Asked Questions

What happens if the borrower cannot pay a guarantor loan?
The guarantor becomes liable for the guaranteed portion of the loan. The lender can pursue the guarantor for repayment, and in the worst case, force the sale of the property used as security for the guarantee. This is the core risk every guarantor must understand.
Can a guarantor be removed from a home loan?
Yes, once the borrower has built enough equity — typically 80% LVR or better — they can refinance or request a guarantee release. This usually requires a property valuation and a fresh serviceability assessment by the lender.
Does a guarantor have to be a family member?
Most lenders restrict guarantors to immediate family members — typically parents. Some lenders accept siblings or de facto partners. Friends and extended family are rarely accepted. Each lender has its own guarantor eligibility policy.