ALS Mortgage Solutions

Guarantors Guide

Understanding Family Guarantees and How They Can Help You Buy Sooner

For many Australians, saving a 20% deposit while paying rent feels like running on a treadmill—you're working hard but not getting anywhere. Property prices keep rising, and that deposit goal keeps moving further away. This is where a family guarantee can be a game-changer, potentially helping you buy years earlier than you could on your own.

A guarantor loan allows a family member (usually parents) to use the equity in their property to help secure your home loan. It's not about giving you money—it's about providing additional security that reduces the lender's risk and can eliminate the need for Lenders Mortgage Insurance (LMI).

What is a Guarantor Loan?

A guarantor loan is a type of home loan where a family member (typically a parent) uses the equity in their property as additional security for your loan.

Key Benefits of Guarantor Loans

  • Buy with a smaller deposit: Purchase with as little as 5% deposit or even less in some cases
  • Avoid LMI: Save $10,000-$30,000 or more by eliminating Lenders Mortgage Insurance
  • Enter the market sooner: Stop renting and start building equity years earlier
  • Limited guarantee amount: The guarantor is only responsible for a portion of the loan, not the whole amount

How Guarantor Loans Work

The guarantor provides their property as additional security, which reduces the lender's risk and can help you qualify for a larger loan or avoid LMI.

Example: Purchasing a $600,000 Property

Your deposit: $30,000 (5%)

Total loan required: $570,000

Main loan (80% LVR): $480,000 — secured against your property only

Guarantee portion: $90,000 — secured against both properties

Result: No LMI payable, saving approximately $15,000-$20,000

The Guarantee Release Process

The guarantee isn't permanent. Once you've built enough equity in your property (typically when your loan-to-value ratio drops to 80% or below), you can apply to have the guarantee released. This can happen through:

  • Property value growth (natural appreciation)
  • Paying down the loan principal
  • Making additional lump sum payments
  • A combination of all three

Who Can Be a Guarantor?

Family members who can typically act as guarantors include parents, grandparents, siblings, or other family members with equity in their property.

Typical Guarantor Requirements

  • Usually parents or immediate family members
  • Must own property with sufficient equity
  • Generally must be Australian residents
  • Must receive independent legal advice
  • Age limits may apply (some lenders cap at 65-70)

Property Requirements

  • Residential property (usually owner-occupied)
  • Sufficient available equity
  • Located in acceptable areas
  • Standard construction type
  • Not already used as security for another guarantee

Understanding the Risks

Understanding the risks involved for guarantors is essential. If the borrower defaults, the guarantor's property may be at risk.

Important: Guarantor Responsibilities

If the borrower defaults on their loan repayments, the lender can pursue the guarantor for the guaranteed amount. In extreme cases, this could mean the guarantor needs to sell their property or refinance to cover the debt. This is why limited guarantees and proper structuring are so important.

Key Risks to Consider

  • Liability for default: If the borrower can't pay, the guarantor may be required to cover the guaranteed portion
  • Impact on borrowing capacity: The guarantee reduces the guarantor's available equity and may affect their ability to borrow
  • Relationship strain: Money matters can create tension in family relationships
  • Limited control: Guarantors have no control over how the borrower manages their finances

Protecting the Guarantor

We always recommend these protective measures:

  • Limited guarantee: Only guarantee the minimum amount needed (usually 20% of the property value)
  • Independent legal advice: All guarantors must (and should want to) receive independent legal advice
  • Clear exit strategy: Plan for when and how the guarantee will be released
  • Open communication: Maintain honest conversations about finances and repayment ability

Alternatives to Guarantor Loans

There are alternatives to guarantor loans including saving a larger deposit, using a low-deposit loan with LMI, or exploring government schemes.

First Home Guarantee (FHBG): Government scheme allowing 5% deposit with no LMI for eligible first home buyers

Gift funds: Family members can gift deposit funds instead of providing a guarantee

Low deposit loans: Some lenders offer loans with 5-10% deposit (LMI applies)

First Home Super Saver Scheme: Use super contributions to boost your deposit

How ALS Mortgage Solutions Can Help

ALS Mortgage Solutions can help you understand guarantor options and find the best solution for your situation.

  • Expert advice on guarantee structuring and risk minimisation
  • Access to lenders with favourable guarantor loan policies
  • Clear explanation of obligations for both parties
  • Planning for guarantee release at the earliest opportunity
  • Coordination with solicitors for independent legal advice

Ready to Explore Guarantor Loan Options?

Contact us today to learn more about guarantor loans and how they could help you buy your dream home.

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