How to Use a Guarantor Loan to Buy Property in Australia with a Small Deposit

Saving for a 20% deposit while property prices keep rising is one of the biggest hurdles for Australian home buyers. A guarantor home loan offers a practical solution, allowing you to purchase a property with a smaller deposit—sometimes as little as 5%—by having a family member use their own property as security. This guide explains how guarantor loans work, who qualifies, and what both borrowers and guarantors need to know before signing up.


What Is a Guarantor Home Loan?

A guarantor home loan is a mortgage where a third party—usually a close family member—agrees to use the equity in their own property as additional security for your loan. This reduces the lender’s risk, enabling you to borrow a higher percentage of the property’s value without paying Lenders Mortgage Insurance (LMI). In Australia, these are sometimes called family pledge loans or family guarantee loans.

How It Works

The guarantor provides a limited guarantee, typically covering the shortfall between your deposit and the 20% threshold. For example, if you’re buying a $600,000 property with a 5% deposit ($30,000), you’d normally need a $90,000 deposit to avoid LMI. With a guarantor, the lender takes a mortgage over the guarantor’s property for the $60,000 difference. This security is usually released once you’ve built enough equity or repaid that portion.

Types of Guarantees

• Security Guarantee: The guarantor offers their property as collateral. This is the most common form.
• Income Guarantee: The guarantor’s income is used to boost your borrowing capacity, though this is less common and riskier for the guarantor.
• Limited Guarantee: The guarantee is capped at a specific amount, protecting the guarantor from unlimited liability.

Most Australian lenders only accept immediate family members as guarantors, such as parents, siblings, or occasionally grandparents.

Eligibility Criteria for Borrowers and Guarantors

Both parties must meet strict criteria. Lenders assess the borrower’s ability to repay and the guarantor’s financial stability.

Borrower Requirements

• Stable income: You need to show reliable employment or business income.
• Good credit history: A clean credit report is essential.
• Genuine savings: Some lenders require evidence of at least 5% genuine savings, though rental history or other factors may be considered.
• Debt-to-income ratio: Your existing debts must be manageable.

Guarantor Requirements

• Sufficient equity: The guarantor’s property must have enough equity to cover the guarantee. Typically, lenders require the guarantor to own at least 20% of their property’s value outright.
• Age limits: Most lenders require guarantors to be under 65 or 70, though some have no maximum age if the guarantee is limited.
• Independent legal advice: Guarantors must receive legal advice from a solicitor independent of the borrower’s solicitor.
• Australian residency: Guarantors usually need to be Australian citizens or permanent residents.

Property Types Accepted

Lenders generally accept residential properties in major cities and regional centres. The guarantor’s property must be in good condition and free of major encumbrances. Some lenders restrict guarantees to properties in certain postcodes.

Benefits of Using a Guarantor Loan

Guarantor loans offer several advantages for first-home buyers and those struggling to save a large deposit.

1. Enter the Market Sooner

With a 5% deposit, you can buy years earlier than waiting to save 20%. In a rising market, this can mean significant equity gains.

2. Avoid Lenders Mortgage Insurance

LMI can add thousands to your loan cost. By avoiding it, you save upfront and keep your loan amount lower.

3. Potentially Access Better Interest Rates

Because the lender’s risk is reduced, you may qualify for standard variable rates rather than higher-risk loan products.

4. No Cash Outlay from Guarantor

The guarantor doesn’t need to provide cash—just equity in their property. This makes it an accessible way for families to help.

5. Borrow Up to 105% of Purchase Price

Some lenders allow you to borrow the full purchase price plus costs, meaning you can buy with virtually no deposit if you have a guarantor covering the shortfall.

Risks and Considerations for Borrowers and Guarantors

While guarantor loans are helpful, they come with serious risks that both parties must understand.

For Borrowers

• Higher debt: Borrowing 95% or more means larger repayments and more interest over time.
• Risk of negative equity: If property values fall, you could owe more than the home is worth.
• Strain on family relationships: Financial arrangements can cause tension if something goes wrong.

For Guarantors

• Property at risk: If you default, the lender can force the sale of the guarantor’s property to recover the guaranteed amount.
• Impact on borrowing capacity: The guarantee appears as a liability on the guarantor’s credit file, potentially limiting their own borrowing ability.
• Retirement implications: Tying up equity may affect plans to downsize or access aged care.

Mitigating the Risks

• Limited guarantee: Always cap the guarantee to the minimum amount needed.
• Exit strategy: Have a clear plan to release the guarantee, typically by reducing the loan balance or when the property value increases.
• Insurance: Consider income protection insurance for the borrower.

Step-by-Step Application Process

Applying for a guarantor loan involves several extra steps compared to a standard mortgage.

Step 1: Assess Your Financial Situation

Review your income, expenses, and credit history. Use online calculators to estimate borrowing power and repayments.

Step 2: Discuss with Potential Guarantor

Have an open conversation about the risks and responsibilities. The guarantor should seek independent legal and financial advice.

Step 3: Choose a Lender

Not all lenders offer guarantor loans, and terms vary. Compare interest rates, fees, and guarantee release policies. A mortgage broker can help navigate options.

Step 4: Gather Documentation

Both parties will need to provide:

• Identification (passport, driver’s licence)
• Proof of income (payslips, tax returns)
• Bank statements
• Property details (for both the purchase and the guarantor’s property)
• Guarantor’s mortgage statements and rates notice

Step 5: Submit Application and Guarantee Documents

The lender will assess both the borrower’s and guarantor’s financial positions. The guarantor must sign a guarantee agreement after receiving legal advice.

Step 6: Property Valuation

The lender will value both properties to confirm sufficient equity and acceptable security.

Step 7: Loan Approval and Settlement

Once approved, the loan proceeds to settlement. The guarantee is registered on the guarantor’s property title.

Step 8: Plan to Release the Guarantee

Monitor your loan balance and property value. When the LVR drops below 80% (or the guaranteed amount is covered), you can request a release. This usually requires a valuation and may involve a fee.

Comparing Guarantor Loans Across Major Lenders

Terms and conditions vary significantly. Here’s a snapshot of offerings from some major Australian lenders (data as of 2025):

Note: Policies change frequently. Always check current terms with the lender or a broker.

Alternatives to Guarantor Loans

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

• LMI with a smaller deposit: Some lenders allow 5% deposit with LMI, though this adds cost.
• First Home Loan Deposit Scheme (FHLDS): The government guarantees up to 15% of the loan, allowing a 5% deposit without LMI for eligible first-home buyers.
• Shared equity schemes: State government programs where the government co-owns a portion of the property.
• Gifted deposit: A family member gives you cash for the deposit, with no guarantee required.
• Saving longer: While slower, it avoids extra costs and risks.

FAQ

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

It can be an excellent way to enter the market earlier and avoid LMI, but it’s crucial to ensure you can comfortably afford repayments. Consider future interest rate rises and your job security.

Can a guarantor be removed from the loan later?

Yes, most lenders allow the guarantee to be released once the borrower’s loan-to-value ratio falls below 80% (or the guaranteed amount is covered) and they’ve demonstrated a good repayment history, typically after 12 months.

What happens if the borrower defaults on a guarantor loan?

The lender will first try to recover the debt from the borrower’s property. If there’s a shortfall, they can pursue the guarantor’s property up to the guaranteed amount. This is why a limited guarantee is essential.

Can I use a guarantor if I’m self-employed?

Yes, but you’ll need to provide stronger evidence of income, such as two years of tax returns and business financials. Some lenders have stricter criteria for self-employed borrowers.

How long does the guarantor application process take?

It typically adds 1–2 weeks to the standard mortgage approval timeline due to the extra documentation and legal advice requirement.

References

1. Australian Securities and Investments Commission (ASIC) – MoneySmart: “Family Guarantees” (2024)
   https://moneysmart.gov.au/borrowing-and-credit/home-loans/family-guarantees

2. Commonwealth Bank of Australia – “Family Pledge” (2025)
   https://www.commbank.com.au/home-loans/family-pledge.html

3. Westpac Banking Corporation – “Family Guarantee” (2025)
   https://www.westpac.com.au/personal-banking/home-loans/types/family-guarantee/

4. National Australia Bank – “Family Guarantee” (2025)
   https://www.nab.com.au/personal/home-loans/help-and-guides/family-guarantee

5. Australian Government – National Housing Finance and Investment Corporation: “First Home Guarantee” (2025)
   https://www.nhfic.gov.au/what-we-do/first-home-guarantee/