Saving a 20% deposit for a home in today’s market can take years. In Geelong, where median house prices sit around $680,000 to $750,000, a 20% deposit means saving $136,000 to $150,000 plus stamp duty and purchasing costs. For many young Australians, this feels impossibly out of reach, even when they can comfortably afford the monthly repayments. This is where a guarantor home loan can bridge the gap. At Mortgage & Finance Advisory, we regularly help families across Geelong, the Surf Coast, Melbourne, and regional Victoria structure guarantor loans that get buyers into the market sooner while managing risk for everyone involved.
A guarantor home loan uses the equity in a family member’s property as additional security for your home loan. The guarantor doesn’t give you money or go on the title of your property. Instead, they allow the lender to place a limited mortgage over their property, which acts as a safety net if you default on your loan.
In practice, the loan is typically split into two parts. The first is a standard home loan covering up to 80% of the property value. The second is a smaller “guarantor portion” covering the remaining amount (usually up to 20% of the property value). The guarantor’s property secures only the smaller portion, not the entire loan. This structure limits the guarantor’s exposure.
For example, if you’re buying a $700,000 home with a 5% deposit ($35,000), you need to borrow $665,000. Without a guarantor, you’d need LMI because you’re borrowing more than 80% of the property value. With a guarantor, the loan is split: $560,000 (80% LVR) as a standard home loan, and $105,000 (15% of the property value) secured against the guarantor’s property. No LMI is required on either portion because neither exceeds 80% LVR.
Security guarantee (limited guarantee): This is the most common type. The guarantor provides their property as additional security, but they are not responsible for making repayments. Their liability is typically limited to the guaranteed amount (the portion of the loan secured against their property). Most major lenders prefer this structure because it clearly limits the guarantor’s risk.
Security and income guarantee: In this arrangement, the guarantor’s income is also considered in the lender’s serviceability assessment. This can be helpful if the borrower’s income alone is insufficient to service the loan. However, this type of guarantee carries greater risk for the guarantor because they may be called upon to make repayments if the borrower cannot.
Family pledge or family equity guarantee: Some lenders have specific products designed for family guarantor arrangements, often with more favourable terms and clearer structures for limiting the guarantor’s exposure. These products may have specific maximum guarantee amounts and clear pathways for releasing the guarantee once sufficient equity is built.
Lender policies on who can act as a guarantor vary, but most have strict eligibility requirements. Parents are accepted by virtually all lenders that offer guarantor loans, and they are the most common type of guarantor. Siblings are accepted by some lenders, though policies are less consistent. Grandparents may be accepted, but age limits can be an issue, as some lenders have maximum age requirements for guarantors. De facto partners, spouses, friends, and non-family members are generally not accepted as guarantors by mainstream lenders.
The guarantor must have sufficient equity in their property to cover the guaranteed amount. If the guarantor still has a mortgage on their property, the lender will assess the available equity after accounting for the existing mortgage balance. The guarantor’s property must also be in Australia and meet the lender’s security requirements.
Additionally, guarantors typically need to demonstrate that they can service their own debts independently. If providing the guarantee would put the guarantor under financial stress, the lender may decline the arrangement. This is a responsible lending obligation: the lender must ensure the guarantee doesn’t put the guarantor’s own financial position at risk.
While guarantor arrangements are generally safe when structured correctly, it’s important to understand the risks clearly. The guarantor’s property is at risk if the borrower defaults on the loan AND the sale of the borrower’s property doesn’t cover the outstanding debt AND the borrower can’t repay the shortfall from other assets or income. Only then would the lender potentially call on the guarantor’s property.
The guarantor’s borrowing capacity is also affected. While the guarantee is in place, other lenders will treat the guaranteed amount as a liability when assessing the guarantor’s borrowing capacity. This means if the guarantor wants to refinance their own loan, borrow additional funds, or apply for credit, the guarantee may reduce their options.
To minimise these risks, we always recommend limiting the guarantee to the minimum amount necessary, ensuring the borrower has a clear plan to build equity and release the guarantee within 3 to 5 years, maintaining open communication between borrower and guarantor about the loan’s performance, and having the guarantor obtain independent legal and financial advice before signing.
A young couple in Ocean Grove wanted to buy their first home for $620,000 but had only $40,000 saved (about 6.5%). Without a guarantor, they would have needed to pay approximately $14,000 in LMI and still borrow at 93.5% LVR, with limited lender options at that ratio. The buyer’s parents owned their home in Geelong outright, valued at $780,000. We structured a limited security guarantee of $84,000 against the parents’ property, bringing the effective LVR on both portions below 80%. The couple avoided LMI entirely, saving $14,000, and accessed a better interest rate (5.89% vs 6.24% at the higher LVR). After two years of making repayments and with modest property value growth, they had reached 80% LVR and the guarantee was released, freeing the parents’ property from any obligation.
The guarantee can be released once you’ve built sufficient equity in your property, typically when your loan-to-value ratio reaches 80% or below. This can happen through a combination of regular loan repayments reducing your balance, making extra repayments to pay down the loan faster, and property value growth increasing your equity position.
To release the guarantee, you’ll need to apply to your lender and provide evidence that your property’s current value (via a new valuation) supports an LVR of 80% or less on the remaining loan balance. The lender will then discharge the mortgage over the guarantor’s property, freeing them from any further obligation. There may be a small fee for the valuation and discharge, typically $300 to $600.
If you have the option of either using a guarantor or paying Lenders Mortgage Insurance, the decision comes down to cost, family dynamics, and your long-term plans. LMI is a one-off cost (or can be capitalised into your loan) that provides the lender with insurance if you default. It costs anywhere from $5,000 to $35,000 or more depending on your loan size and LVR. The advantage of LMI is that it involves no family member and no ongoing obligation. The disadvantage is the significant upfront cost.
A guarantor arrangement avoids the LMI cost entirely and may give you access to better interest rates (since the effective LVR is below 80%). However, it involves a family member’s property, creates an ongoing obligation until the guarantee is released, and requires the guarantor to obtain independent legal advice (typically $300 to $500). For most families, the savings from avoiding LMI far outweigh the minor costs of setting up the guarantee.
| Factor | Guarantor Loan | Paying LMI |
|---|---|---|
| Upfront cost | $300 to $500 (legal advice) | $5,000 to $35,000+ |
| Interest rate | Standard rates (sub-80% LVR) | May be higher (above 80% LVR) |
| Family involvement | Yes, requires family guarantor | No family involvement needed |
| Ongoing obligation | Until guarantee released (2 to 5 years) | None after payment |
| Impact on guarantor | Reduces their borrowing capacity | No impact on others |
A guarantor arrangement is not the only way to buy with a small deposit. Before asking family to put their property forward as security, consider these alternatives.
First Home Guarantee. Eligible first home buyers can purchase with a 5% deposit and no LMI, with the federal government guaranteeing the difference. No family member takes on any risk, but income and property price caps apply and places are limited each year.
Family gift or loan. Instead of guaranteeing your loan, family can gift or lend deposit funds directly. This avoids any ongoing security over their property, but it requires the family to have accessible cash rather than just equity in their home. For a comparison of gifted deposits, family loans and guarantees, see our guide to bank of mum and dad home loans.
Paying LMI instead. Sometimes paying LMI makes sense: if buying sooner means you benefit from property growth, the LMI cost may be offset by equity gains. The comparison table above shows how the costs stack up, and we can model this comparison for your specific situation.
All lenders require guarantors to receive independent legal advice before signing the guarantee. This is a consumer protection measure that ensures the guarantor fully understands their obligations and risks. The guarantor must see a different solicitor to the borrower. The same lawyer cannot advise both parties. The solicitor will explain the guarantee terms, the maximum liability amount, the circumstances under which the lender can call on the guarantee, how and when the guarantee can be released, and the impact on the guarantor’s own financial position and borrowing capacity.
The solicitor will then provide a certificate confirming that they have explained the guarantee to the guarantor, that the guarantor understands the terms and risks, and that the guarantor is entering into the arrangement voluntarily. This certificate is a condition of the loan approval, and the lender will not proceed without it. The cost of this legal advice is typically $300 to $500 and is usually paid by the guarantor, though some borrowers choose to cover this cost.
The way the guarantee is structured can significantly affect the risk for both the borrower and the guarantor. The first principle is to limit the guarantee to the minimum amount necessary. If you have some savings (even 5 to 10% of the purchase price), use them as a deposit and only guarantee the shortfall to reach 80% LVR. This minimises the amount secured against the guarantor’s property.
The second principle is to split the loan into two portions: the main loan (up to 80% LVR secured against your property) and the guaranteed portion (the excess, secured against the guarantor’s property). This way, the guarantor’s exposure is clearly limited, and as you pay down the guaranteed portion or your property value increases, the guarantee can be released without affecting the main loan.
The third principle is to create a clear exit plan. Before setting up the guarantee, work with your broker to model how quickly you can build enough equity to release the guarantee. This might involve making extra repayments, using an offset account, or planning for natural property value growth. Having this roadmap gives both the borrower and guarantor confidence and a clear timeline for ending the arrangement.
First home buyers in Waurn Ponds wanted to purchase a $590,000 property with $45,000 in savings. Without a guarantor, their LVR would be 92.4%, triggering approximately $11,500 in LMI. Their parents owned a property in Belmont valued at $720,000 with $180,000 remaining on their mortgage. We structured a limited guarantee of $72,000 (the difference between the buyers’ deposit and 20% of the purchase price). The parents had $540,000 in equity, so the guarantee was easily supported. The buyers saved the $11,500 in LMI and secured a rate 0.35% lower than what was available at 92% LVR. Within 3 years, through regular repayments and modest property growth, the buyers reached 80% LVR and the guarantee was released.
Misconception: The guarantor is responsible for making my repayments. This is incorrect with a security-only guarantee. The guarantor provides their property as security but has no obligation to make your loan repayments. The lender can only turn to the guarantor’s property if you default, the property is sold, and there’s still a shortfall. In practice, the lender will exhaust all other options before calling on the guarantee.
Misconception: The guarantor’s entire property is at risk. With a limited guarantee structure, the guarantor’s liability is capped at the guaranteed amount, not the full loan balance. If the guarantee is limited to $100,000, that’s the maximum the guarantor could be liable for, regardless of the total loan size.
Misconception: The guarantee lasts forever. Guarantees can be released once the borrower builds sufficient equity. Most guarantees are released within 2 to 5 years. The lender has no interest in keeping the guarantee in place longer than necessary, and most have simple processes for releasing guarantees once the LVR criteria are met.
Misconception: You need no savings at all. While some lenders will accept a guarantor loan with no deposit from the borrower, most still require the borrower to have enough savings to cover purchasing costs such as stamp duty, legal fees, and building and pest inspections. Having genuine savings also demonstrates to the lender that you have the financial discipline to manage mortgage repayments.
Misconception: Any family member can be a guarantor. Most lenders restrict guarantors to immediate family members, typically parents. Some will accept siblings, and a few will consider grandparents (subject to age limits). Extended family members like aunts, uncles, and cousins are generally not accepted, and friends or business partners are almost never eligible.
Some lenders allow guarantor arrangements for investment property purchases, though policies are more restrictive than for owner-occupied properties. The availability of this option and the maximum LVR permitted vary between lenders. Your broker can identify which lenders are most flexible in this area.
Most lenders require the guarantor’s property to be in Australia, but it doesn’t need to be in the same state as the property you’re purchasing. However, some lenders have preferences for properties in metropolitan areas or may apply different valuation methods for regional or rural properties.
Yes, as long as they have sufficient equity in their property after accounting for their existing mortgage. For example, if their home is worth $800,000 and they owe $200,000, they have $600,000 in equity. Lenders will typically allow them to guarantee up to a portion of that available equity. The exact amount depends on the lender’s policy and the guarantor’s ability to service their own debts.
If you sell your property and repay the loan in full, the guarantee is automatically released and the mortgage over the guarantor’s property is discharged. If you sell and still owe more than the sale price (negative equity), the lender may call on the guarantee to cover the shortfall.
Most borrowers are able to release the guarantee within 2 to 5 years, depending on how quickly they build equity through repayments and property value growth. In strong property markets, this can happen faster. Making extra repayments or parking savings in an offset account can accelerate the process.
Our experienced brokers compare options across 60+ lenders to find the right solution for your situation.
Director & Senior Finance Broker
With years of experience in mortgage broking and finance, Melanie helps clients across Geelong, the Surf Coast, Melbourne and regional Victoria navigate the complexities of home loans and business finance. Contact our team on 03 9020 2699.
