In short: A guarantor home loan lets you buy with a small deposit or none by having a close family member, usually a parent, offer part of the equity in their home as extra security. The lender treats your loan as if you had a 20% deposit, so you pay no lenders mortgage insurance. The guarantee is limited to a set amount and released once you build enough equity.
For many buyers in Melbourne's north, the gap between a 5% deposit and a 20% deposit is $90,000 or more. Saving it takes years; a family guarantee closes it in a single signature. It is a powerful tool, but it puts the guarantor's home on the line for a defined amount, so both sides need to understand the mechanics before anyone signs. This guide explains how it works in 2026, what it costs, who can be a guarantor and how to get them off the loan again.
How a guarantor loan works
The security structure
You take out a loan for up to 100% of the purchase price, sometimes 105% to cover stamp duty and costs. The lender takes two mortgages:
- A mortgage over the property you are buying, as normal.
- A limited mortgage over the guarantor's property, securing only the "guaranteed amount", which is the portion of your loan above 80% of your property's value.
Because the total security covers the loan comfortably, the lender's exposure looks like an 80% loan and no LMI is charged. The guarantor is not a co-borrower: they do not make repayments and their income is not used to service the loan. They are liable only for the guaranteed amount, and only if you default and the sale of your property does not cover the debt.
Worked example: $650,000 house in Craigieburn
Rohan has saved $20,000 and wants to buy a $650,000 four-bedroom house in Craigieburn. His parents own a Greenvale home worth $900,000 with $250,000 owing.
| Item | Without guarantor | With parental guarantee |
|---|---|---|
| Purchase price | $650,000 | $650,000 |
| Deposit | $20,000 (3.1%) | $0 (savings kept for costs) |
| Loan amount | not approved under 5% | $650,000 |
| Loan-to-value ratio on Rohan's property | n/a | 100% |
| Guaranteed amount (loan above 80% of $650,000) | n/a | $130,000 |
| Lenders mortgage insurance | n/a | $0 |
| Monthly repayment at 6.00% p.a. over 30 years (illustration) | n/a | approx. $3,898 |
Rohan's parents' Greenvale home has $650,000 of equity, so securing $130,000 leaves them plenty of room. They are on the hook for $130,000, not $650,000. Rohan's $20,000 covers conveyancing, lender fees and a buffer, and because he is a first home buyer on a property under $750,000, he pays approximately $11,357 in stamp duty rather than $34,070. Once his property rises to about $813,000 or his loan falls to $520,000, the guarantee can be released.
If Rohan instead bought with a 5% deposit and paid LMI, the premium would be indicatively $26,000 on a $617,500 loan. The guarantee saves that outright. Compare scenarios with the LMI calculator.
Who can be a guarantor
Lender policies vary, but the usual requirements are:
- Relationship: parents (including step-parents) are accepted everywhere; siblings, grandparents and adult children at many lenders; in-laws and friends rarely.
- Property: an Australian residential property with enough equity to cover the guaranteed amount within the lender's LVR limits. Investment properties are usually acceptable.
- Age and income: guarantors approaching or in retirement face extra scrutiny. Lenders must be satisfied the guarantor could meet the guaranteed amount without hardship, and many require independent legal advice for guarantors over 65 or without income.
- Existing loan: a guarantor can still have a mortgage, provided the combined lending against their home stays within limits, and their existing lender may need to consent or the guarantee may need to be with the same lender.
- Legal advice: most lenders require the guarantor to obtain independent legal advice and sign a certificate confirming it. This protects both the guarantor and the lender.
The legal side is detailed in guarantor legal responsibilities.
Benefits for the buyer
- No LMI. The single biggest saving; $12,000 to $30,000 on a typical northern-corridor purchase.
- Buy sooner. You skip the years of saving from 5% to 20%.
- Larger deposit-equivalent gets better rates. Lenders price an 80% LVR loan more sharply than a 95% one.
- Genuine savings often waived. Many lenders drop the savings requirement when a guarantee is in place. See genuine savings explained.
- Borrow costs. Some lenders allow up to 105% to include stamp duty and fees, so the buyer needs almost no cash.
- First home buyer benefits still apply. The stamp duty exemption and First Home Owner Grant depend on the property and your occupancy, not on how the loan is secured.
Risks for the guarantor
The guarantor's risk is real but bounded. If you stop paying and the lender sells your property for less than you owe, the lender can pursue the guarantor for the shortfall up to the guaranteed amount. In the Craigieburn example that is $130,000. The lender can, in the worst case, force the sale of the guarantor's property to recover it, although it must exhaust your property first.
Other consequences for the guarantor:
- Their borrowing capacity is reduced while the guarantee is in place, because the guaranteed amount is treated as a contingent liability.
- Selling or refinancing their own home becomes more complicated until the guarantee is released.
- Family relationships can be strained if payments are missed.
- Under the National Consumer Credit Protection Act the guarantor has rights, including to information about the loan and to hardship processes, but they cannot simply withdraw once the loan has settled.
Lenders take guarantor protection seriously and so should you. The guarantor should never guarantee more than they could pay without selling their home. See financial hardship rights for what happens if things go wrong.
Releasing the guarantor
The guarantee is meant to be temporary. It can be released when your loan is 80% or less of your property's current value, which happens through:
- Principal repayments. Paying down $650,000 to $520,000 takes about 8 years at minimum repayments at 6.00%, or much less with extra repayments. Model it with the extra repayments calculator.
- Property growth. If the Craigieburn house rises to $813,000, the $650,000 loan is 80% and the guarantee can go.
- A combination. Most releases happen 2 to 5 years in, when modest growth and modest extra repayments meet.
To release, you ask the lender for a valuation, and if the numbers work the lender discharges the mortgage over the guarantor's home. There is usually a discharge fee. If the numbers do not quite work, you can pay LMI on the remaining gap or refinance to a lender with a different valuation. Track your progress with the equity calculator.
Guarantor loan versus the alternatives
| Option | Deposit needed | LMI | Government caps | Who bears the risk |
|---|---|---|---|---|
| Guarantor loan | 0–5% | None | None | Guarantor for the guaranteed amount |
| First Home Guarantee | 5% | None | $950,000 Melbourne; owner-occupier first home buyer | Government guarantees the lender |
| 5–10% deposit with LMI | 5–10% | Indicatively 2–4.5% of loan | None | You pay the premium |
| Gifted deposit | 5–20% gifted | Depends on final LVR | None | Giver loses the cash |
| Help to Buy | 2% | None | Income and price caps | Government owns a share |
For an eligible first home buyer under the price cap, the First Home Guarantee is often simpler than a family guarantee because nobody's home is at risk. A guarantor loan wins when you are not eligible (you have owned before, or the property is over $950,000, or you are buying an investment), when you want to borrow costs too, or when you want the pricing of an 80% loan. Some buyers use both: a guarantee for the LMI and a small parental guarantee to get to 80% pricing. Compare in First Home Guarantee: 5% deposit and our low deposit home loans page.
Checklist before you sign
For the buyer
- Confirm you can service the full loan at your rate plus 3 percentage points; the guarantee does not help borrowing power
- Decide whether to borrow costs (105%) or fund them from savings
- Understand the release conditions and set a target date
- Insure the property and consider income protection; a job loss is the guarantor's risk too
For the guarantor
- Get independent legal advice, and financial advice if near retirement
- Confirm the guarantee is limited to a stated dollar amount, not the whole loan
- Check the impact on your own plans to sell, refinance or borrow in the next few years
- Ask the lender for annual statements on the guaranteed loan
- Consider a family agreement in writing about what happens if payments are missed
Common mistakes
- Guaranteeing the whole loan. Always insist on a limited guarantee for the amount above 80% only. Unlimited guarantees expose the family home needlessly.
- Assuming the guarantee adds borrowing power. It only replaces deposit and LMI. Servicing is assessed on the buyer's income alone.
- Forgetting the guarantor's own lender. If the parents' mortgage is with a different bank, that bank may refuse a second mortgage, forcing a refinance.
- Not planning the release. Guarantees linger for a decade when nobody tracks equity. Review it every year.
- Skipping legal advice to save $500. Courts have set aside guarantees where the guarantor did not understand them; lenders now require advice for that reason. Skipping it can delay settlement.
- Using a guarantor for an investment loan without telling them. Investment loans carry more risk and the guarantor should know what they are securing. Read investment property loans if this is your plan.
Frequently asked questions
Can my parents be guarantor if they still have a mortgage?
Yes, provided their home has enough equity. The lender adds your guaranteed amount to their existing loan and checks the total stays within its limits, usually 80% of their property value. If their mortgage is with a different lender, that lender must consent to a second mortgage, or the guarantee may need to be set up with the same lender. Many families refinance the parents' loan to the new lender to keep it simple.
How much deposit do I need with a guarantor?
Often none. Most lenders allow 100% of the purchase price with a guarantee, and some allow up to 105% to include stamp duty and costs. You will still need funds for anything the lender does not cover, and you must pass the serviceability test on your own income for the full loan. Some lenders prefer to see a small contribution, and a few still require genuine savings; policy varies.
Does a guarantor need to earn an income?
Not always, but lenders assess whether the guarantor could meet the guaranteed amount if called upon. A retired guarantor with a fully owned home is usually accepted, often with a requirement for independent legal and sometimes financial advice. Lenders are cautious where a guarantee could force the sale of a pensioner's only home, and some cap the guarantor's age or require a clear exit plan.
How long does a guarantor stay on the loan?
Until the loan is 80% or less of the property's value, or you pay LMI on the remaining gap. There is no fixed term. Most guarantees are released within 2 to 5 years through a mix of principal repayments and property growth. You must ask the lender for the release; it does not happen automatically. A valuation is required, and a discharge fee usually applies.
What happens to the guarantor if I default?
The lender must first pursue you and sell your property. If the sale does not cover the loan, the lender can claim the shortfall from the guarantor up to the guaranteed amount. If the guarantor cannot pay, the lender can enforce its mortgage over the guarantor's property. Guarantors have hardship rights and can complain to AFCA, but they cannot withdraw from the guarantee once the loan has settled.
Is a guarantor loan better than paying LMI?
Financially, yes in most cases: LMI of $12,000 to $30,000 is a sunk cost, whereas a guarantee costs a few hundred dollars in legal fees and is released later. The trade-off is risk to the guarantor and the strings that come with it. If you are eligible for the First Home Guarantee, you can avoid LMI without involving family at all. See understanding LVR and LMI for the numbers.
Talk to GNT Finance
We structure guarantor loans for families across Melbourne's north every week, including cases where parents have an existing mortgage or are close to retirement. We'll explain the limited guarantee to everyone involved, in English, Nepali or Hindi, and plan the release from day one. Book a free consultation or call 0426 403 703, or read about our guarantor home loans service.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.