Guarantor Loans Explained: What It Means for You and Your Parents

For a lot of first home buyers, the deposit is the hardest part. Prices have moved faster than most people's savings and even with a good income, getting to 20% can take years. A guarantor loan is one way to close that gap, but it's not something to jump into without understanding exactly what it involves, for both you and the person backing you.

What a guarantor loan actually is

A guarantor loan allows a family member, usually a parent, to use the equity in their own property as additional security for your home loan. Instead of you needing a full deposit, the lender takes a limited guarantee over a portion of your parents' property to cover the shortfall. This can allow you to borrow with little or no deposit, while avoiding or reducing Lenders Mortgage Insurance (LMI) in many cases, which is often the biggest saving in the arrangement.

Importantly, the guarantor is not handing over cash and in many guarantor structures, their liability can be limited to an agreed amount rather than the full loan, though this varies by lender, so it's worth confirming the specific terms.

What it means for you as the buyer

The main benefit is speed. Rather than waiting years to save a full deposit, a guarantor loan can get you into the market sooner, particularly useful in a rising market where waiting can mean paying more later. Skipping LMI also reduces your upfront costs.

The trade-off is responsibility. You are borrowing the full purchase price (or close to it), so your loan balance and repayments will typically be higher than someone who saved a larger deposit. It's worth thinking through your buffer for rate rises or changes to your income before committing.

What it means for your parents

This is the part that deserves the most thought. By acting as guarantor, your parents are putting their own property on the line. If repayments were ever missed and the loan fell into default, the lender could pursue the guaranteed portion of their property to recover the shortfall.

In practice, most guarantor arrangements are structured so the guarantee is limited and released once you've built enough equity, usually once the loan balance drops below 80% of the property value, either through repayments or value growth. But your parents should go in with a full understanding of the risk, not just the goal.

It's also worth them getting independent legal advice before signing. This isn't just a formality, it protects everyone by making sure the guarantor fully understands what they're agreeing to.

Getting the guarantee released

A guarantor arrangement isn't meant to be permanent. Most people aim to have the guarantee released as soon as possible, either by paying down the loan, benefiting from property growth, or a combination of both. Keeping an eye on your loan-to-value ratio and reviewing it with your broker periodically means you're not leaving your parents on the hook longer than necessary.

Is it the right option for you?

Guarantor loans work well for buyers who have stable income and can comfortably service the loan, but haven't yet built up a full deposit. They're less suited to buyers whose income or job security is uncertain, given the higher loan amount involved.

Every family's situation is different, and the right structure depends on your income, the guarantor's equity position and your long-term plans. Sitting down with a broker (like Katrina!) to run the numbers for your specific circumstances is the best way to work out whether it's a good fit, and what the alternatives might look like.

If you're weighing up a guarantor loan, get in touch for a no-obligation chat about whether it could work for your situation.

‍

‍

This article is general in nature, does not take into account your personal financial circumstances, and guarantor loan structures vary between lenders. Please seek independent financial and legal advice, and speak with a broker about your specific situation, before entering into a guarantor arrangement.

‍