How guarantor home loans work

Virtually anyone can act as your guarantor, given that they meet the following criteria:

• They have enough equity in their home to offer.
• They have a stable source of income.
• They are at least 18 years of age.
• They are an Australian citizen or permanent resident.

In some cases, they will have to be homeowners themselves and have a sufficient credit rating.

Most lenders prefer that you designate a parent, sibling, grandparent, or other relative as guarantor. Occasionally, lenders will allow borrowers to name a close friend. Some lenders allow pensioners to apply as guarantors, though the practice isn't common as it poses too much financial risk.

Required documents

To prove that they can pay off the loan, guarantors must submit proof of equity – such as the title or deed to their property – and possibly bank statements. Guarantors may also have to undergo a credit check.

Protections

The Australian Banking Association's Banking Code of Practice protects guarantors. Banks that follow it must give guarantors the loan details and the borrower's financial information, tell them to get independent legal advice, and give them time to consider the guarantee before they sign. Guarantors can also withdraw before the loan is drawn down.

Most lenders require guarantors to get independent legal advice before signing, and the guarantor's own solicitor will usually handle the guarantee documents. If the borrower falls behind on repayments, the lender must let the guarantor know.

In the event of a default, a lender will prioritise following up with a borrower before they turn to a guarantor.

Guarantor home loans are ideal for first-time homebuyers or those refinancing their mortgage but who can't afford a down payment of at least 20%. Through this type of loan product, guarantors can commit anywhere between 5% to 100% of the loan value. Here's how it works.

Borrowing capacity

How much you can borrow will ultimately rely on how much your lender is willing to provide. Most will lend 100% to 105% of the property value. To determine the rate, a lender will first evaluate both the borrower and guarantor's financial health and savings record.

Even with the help of a guarantor, some banks will require that you meet a minimum deposit amount, usually from 5% to 15%.

Interest rates

Interest rates on a guarantor home loan are virtually identical to those on regular home loans. These rates can fluctuate depending on your lender and the type of home loan you're pursuing. Rates are often lower when you borrow less than 80% of a property's value, which a guarantee can help you do.

Lenders Mortgage Insurance

Banks will typically enforce an LMI premium on borrowers they consider high-risk – this is particularly the case if you can't make the 20% down payment on a home. So if your loan equates to more than 80% of the property value, you may have to get LMI.

How much you pay upon settlement will depend on the size of the loan and the deposit, though some lenders will offer to finance the LMI into the home loan itself. Whether you hold a regular position with a full-time employer might also affect how much LMI costs.

Our guide to Lenders Mortgage Insurance explains everything you need to know about LMI and how it works.

Defaulting

If you default on your home loan, a lender will turn to your guarantor for the missed payment. Should your guarantor be unable to make the repayment, they could risk losing their home.

Some borrowers apply for hardship to reduce or defer repayments, especially in circumstances of illness, unemployment, or fluctuating financial circumstances. If you qualify for a hardship application, you can decrease monthly payments or extend your repayment terms without worrying about defaulting.

Alternatively, if you can't repay the loan at all, you can opt to sell the property to protect your finances. However, banks are under no obligation to wait on a sale – you'll want to keep them informed regularly and work towards an amicable agreement.

In Australia, guarantor home loans are typically more available with larger, established banks as opposed to small-scale lenders. Offerings may vary and include the following:

Fixed & variable rate

As with a standard home loan, borrowers can select between fixed rate or variable rate terms. Fixed rate terms, where the interest rate does not change, are ideal for first-time buyers as payments remain consistent and predictable throughout the life of the loan. Fixed rate periods usually last from 1 to 5 years.

On the other hand, variable rate terms allow for more flexibility, as rates rely on market fluctuations. With a variable rate loan, borrowers can also switch lenders without paying an exit fee, which has been banned on new variable home loans since 2011.

Extra repayments

There are two benefits to repaying more than the expected amount. First, it'll help build equity in your home and mean you can pay off your home loan faster. Second, it can potentially release your guarantor sooner. However, some banks may charge a fee for extra repayments. Do your research before funnelling extra money into your repayment plan.

Offset accounts

An offset account functions similarly to a regular bank account, except that its positive balance notionally decreases the home loan principal amount that's subject to interest, potentially saving you tens of thousands of dollars over the life of the loan.

A guarantor home loan enables you to bypass some of the financial requirements of a property purchase. However, there are plenty of other monetary advantages – and risks – to consider, both as a borrower and a guarantor.

How it works to your advantage

• You'll enter the homebuying market sooner. If you're new to the workforce, saving up for a home deposit can take years or, in some cases, decades. If you're able to meet the necessary home loan repayments, having a guarantor on your side can help secure additional funds and drive you up the property ladder much faster.
• You can avoid paying LMI. The purpose of LMI is to protect the lender if a borrower defaults, but it adds another expense to your list. A guarantor can help reduce this risk and eliminate the need for LMI altogether.
• You can secure funds without the required 20% deposit. If your most significant obstacle to homeownership is saving up for the 20% down payment on your future property, a guarantor can help secure your application.

What you should look out for

• Your choices are limited. Most banks only allow family members to become guarantors, which means that you'll have fewer options to work with if your parents are unwilling or out of the country.
• Legal action can be taken against you. If you fail to repay the loan, banks will take action against you before they pursue your guarantor.

The guarantor takes on a big share of the loan risk. Here are some of the things a financial sponsor should consider before taking on the responsibility.

General risks

Guarantors are liable for any missing repayments up to the loan amount they guarantee. If both parties default on the loan, banks can go after a guarantor's property to make up for financial losses. Because of this, some guarantors opt to put up an investment property as collateral instead of the family home.

Impact on credit score

The act of signing up as a guarantor doesn't itself affect your credit score. However, as with any loan product, failing to make repayments, if this becomes necessary, can negatively impact credit ratings.

Involving property

If a guarantor chooses to use their home as collateral, this can restrict their ability to purchase a new investment property. This is, in part, because all of their existing equity may be directed towards the loan they are guaranteeing.

Opting out

If a guarantor is having financial trouble, they won't be able to opt out of the commitment until they contribute a certain level of equity. Guarantors have to remain potential active contributors for the duration of the home loan or specified term.

A guarantor home loan isn't for everyone. If you're having trouble finding a guarantor or meeting your payments, there are still other ways to get help:

Pooled resources

Say your family member isn't willing to go guarantor on your home loan. They can opt to pool resources for a joint home purchase instead, and establish the right ownership structure. Draft a co-ownership agreement with a solicitor, and discuss how much each family member is contributing towards the purchase price. Specify whether they are also willing to cover for insurance, administrative fees, and maintenance.

If you decide to split ownership between you and your primary contributor, you can enter a joint tenant or tenants in common contract. Under a joint tenant agreement, remaining contributors inherit the property when one of them passes away. Under a tenants in common agreement, each listed owner holds a stake in the property.

Alternatively, a willing family member could help with a gifted deposit instead.

Gifted deposit

If you're struggling to save up for the down payment on a costly property, consider a gifted deposit rather than paying the deposit with a credit card. Through this scheme, a family can contribute a portion of your deposit or shoulder the entire fee. Because a gifted deposit is not a loan there is no obligation to pay it back, and you will need to provide your lender with a gifted deposit letter stating this fact.

Our guide to home loan gifted deposits explains what they are and how they work. Well worth reading if it's something you are considering.

The 5% Deposit Scheme

The government's 5% Deposit Scheme (formerly the First Home Loan Deposit Scheme) lets first home buyers buy with a deposit as low as 5% and no LMI, because the government guarantees up to 15% of the loan. Since 1 October 2025 there are no income limits and no cap on the number of places for first home buyers, and single parents earning up to $125,000 can buy with a 2% deposit. The home must be under a price cap that depends on where you buy.

Borrowers don't have to pay LMI, which can save them tens of thousands of dollars. To be eligible, you'll have to be at least 18 years old, an Australian citizen or permanent resident, and a first home buyer (or not have owned property in Australia in the past 10 years).

Buying your first property without the appropriate savings can become overwhelming. A guarantor home loan, provided everyone is aware of the risks, can provide sufficient financial assistance and allow you to purchase a property sooner rather than later, which is an important factor in a growing market.