A parent's equity can replace your deposit entirely and eliminate LMI. Here's how it works — including the risks, honestly.
A guarantor loan (family guarantee) lets a family member — usually a parent — use equity in their own property as additional security for your loan. Done properly, it can get you into a home with little or no cash deposit and no LMI.
How It Actually Works
Say you're buying for $800,000 with $20,000 saved. A lender might structure:
- Loan secured by your new home: 80% = $640,000
- Loan secured by your home + guarantor's property: the remaining ~$160,000 slice
The guarantor doesn't hand over money or make repayments. Their property secures only the limited guarantee amount (that top slice), not your whole loan.
The Benefits
- Buy years sooner — no waiting to save 10–20%
- Zero LMI — you're effectively at 80% LVR
- Sharper interest rates than high-LVR lending
- The guarantee is released once your loan falls below ~80% of the property value through repayments and growth — commonly within 2–5 years
The Risks — Stated Honestly
If you default and the property sale doesn't cover the debt, the lender can pursue the guarantor up to the guaranteed amount. In a worst case, that could force the guarantor to pay from savings, borrow against, or sell their property. Because of this:
- Lenders require guarantors to get independent legal advice (and often financial advice)
- Guarantees should always be limited to the specific dollar amount, never unlimited
- Some lenders allow guarantors to be released early or substitute term deposits as security
Who Can Be a Guarantor?
Typically parents; many lenders accept step-parents, grandparents and siblings. The guarantor usually needs to own (or nearly own) their home and demonstrate they could cover the guarantee if called on. Retired guarantors are accepted by some lenders with the right structure.
Guarantor vs. First Home Guarantee
If you have 5% saved and qualify, the FHBG achieves no-LMI without involving family. A guarantor suits buyers with less than 5%, prices above scheme caps, or non-first-home buyers. Sometimes combining family gifting with the FHBG beats a formal guarantee — we model all three paths.
What Guarantors Should Ask Before Signing
Independent legal advice is mandatory with virtually every lender — a solicitor must certify the guarantor understands the obligation (Moneysmart's guarantor guidance is essential pre-reading). Beyond the legals, smart guarantor families ask: is the guarantee limited to a fixed dollar amount (it must be)? What exactly triggers a call on the guarantee? Can the guarantee be secured by a term deposit instead of the family home? What's the documented release pathway? A lender who answers these clearly is a lender worth using; we pre-screen for exactly this in our low deposit and guarantor service.
A Worked Example
Emma is buying at $750,000 with $15,000 saved — 2%. Her parents own their $1.1M home outright. Structure: Loan A of $600,000 (80%) secured by Emma's new home; Loan B of $165,000 (the remaining 20% plus costs) secured by both properties, with her parents' limited guarantee capped at $165,000. Emma pays no LMI — a saving north of $30,000 at this LVR — and gets 80%-tier interest rates on the whole debt. Three years later, repayments plus growth put her property at $860,000 with $700,000 owing: 81% LVR, and after a small extra repayment the guarantee is formally released.
Protecting the Family Relationship
The financial structure is the easy half. The harder half is human: everyone should agree in writing what happens if repayments are missed, and the borrower should carry income protection so illness doesn't cascade into the guarantor's retirement. If the numbers only barely work with a guarantee, they don't work — the First Home Guarantee at 5% with no family risk, or simply a longer save with the FHSSS boosting the deposit, can be the wiser path. We'll tell you which, honestly, in a free assessment.
Alternatives Worth Ruling Out First
A guarantee is powerful but not always necessary. A documented family gift of 5–15% avoids the guarantor's legal exposure entirely — the parents' risk becomes the gifted amount, full stop, and combined with the First Home Guarantee it can achieve the same no-LMI outcome. A family loan (documented, registered second mortgage if desired) keeps repayment expectations explicit. Joint purchase — parents on title for a share — creates co-ownership with capital growth exposure, though it complicates first-home-buyer concessions and land tax. And patient buyers can simply combine the FHSSS with 12–18 more months of saving. Each option shifts risk and control differently between generations; part of our job in a free assessment is putting all four beside the guarantee so the family chooses with full information rather than defaulting to the structure they happened to hear about first.
Frequently Asked Questions
Does a guarantor need income?
For a security-only limited guarantee, many lenders focus on the guarantor's equity rather than income, though they must show capacity to cover the guarantee if called. Policies vary — some lenders are far friendlier to retired guarantors than others.
When is the guarantor released?
Usually once your loan is at or below 80% of your property's value — through repayments, extra payments or price growth. You request a valuation and the lender releases the guarantee. Most releases happen within 2–5 years.
Is the guarantor liable for the whole loan?
No — with a properly structured limited guarantee, liability is capped at the guaranteed slice only (e.g. $160,000), not the full loan. Never sign an unlimited guarantee.
Last reviewed 27 July 2026 by Sam Elvitigala, MFAA Accredited Mortgage Broker. General information only — not personal financial or credit advice.