Guarantor home loans and family security guarantees

A guarantor home loan allows a borrower with a small deposit to buy without lenders mortgage insurance by adding a second property as security. Most commonly a parent offers part of the equity in their own home, and the lender takes a mortgage over that property limited to a specified amount.

The arrangement is often described in gentle terms, as a parent helping out or going guarantor. The legal reality is firmer. A guarantee is an enforceable promise to pay the borrower's debt, secured against the guarantor's home, and it can be called upon. Any family considering one should understand the mechanics and the protections before the documents are signed, not afterwards.

How a security guarantee works

The usual structure is a limited security guarantee, sometimes called a family pledge or family security guarantee. It operates as follows.

1. The borrower buys a property with a small deposit, or in some cases none.
2. The lender takes a first mortgage over the property being purchased.
3. The lender also takes a second mortgage over the guarantor's property, limited to a specified sum rather than the whole loan.
4. The combined loan to value ratio, measured against both properties, is brought to 80 per cent or below, so no mortgage insurance is required.

The guaranteed amount is calculated to cover the shortfall. On a $700,000 purchase where the borrower has no deposit, a lender lending 80 per cent against the purchased property advances $560,000 against that security. To reach $700,000 plus purchase costs of, say, $35,000, the guarantee would need to cover roughly $175,000, and lenders commonly add a margin. The guarantor is then exposed to that figure, not to the full $735,000.

The saving is the mortgage insurance premium. On the indicative table behind this site's LMI calculator, a $700,000 purchase at a 95 per cent loan to value ratio would attract a premium in the order of $24,000. A guarantee removes it. It also allows a purchase that might not otherwise proceed at all, because some lenders will not lend above 95 per cent in any circumstances.

Security guarantee compared with a servicing guarantee

Two different arrangements are both described as guarantees, and the distinction matters.

Feature	Security guarantee	Servicing guarantee
What is offered	Equity in the guarantor's property	The guarantor's income, counted towards serviceability
Purpose	To reduce the loan to value ratio and avoid mortgage insurance	To satisfy the lender that repayments can be met
Liability	Limited to the guaranteed amount, secured by mortgage	Often liability for the whole loan
Availability	Offered by most major lenders	Restricted, and unavailable at many lenders
Typical use	A buyer with income but no deposit	A buyer with a deposit but insufficient assessed income

A servicing guarantee usually exposes the guarantor far more widely than a limited security guarantee, and lenders offer it sparingly, partly because of the risk that the arrangement is unsuitable for the guarantor. Families are generally better served by a limited security guarantee where one is available. Where the difficulty is serviceability rather than deposit, the better first step is usually to examine the borrower's own position, as set out in the guide to how much you can borrow.

What the guarantor is actually liable for

This is the point on which families most often proceed on an incorrect assumption. A limited guarantee caps the amount at risk, but within that cap the liability is real.

• The guarantor can be required to pay. If the borrower defaults and the lender sells the purchased property for less than the debt, the lender may call on the guarantee up to the guaranteed amount.
• The guarantor's home is security for that amount. If the guarantor cannot pay in cash, the lender holds a mortgage and may ultimately enforce it.
• The guarantee reduces the guarantor's own borrowing capacity. A contingent liability of $175,000 is generally treated as a commitment when the guarantor applies for credit, which can prevent them from refinancing, downsizing or borrowing for their own purposes.
• Selling the guarantor's property usually requires the guarantee to be dealt with first. The mortgage must be discharged, which normally means the guarantee is released or replaced.
• The guarantee survives changes in the borrower's circumstances. A relationship breakdown, illness or job loss affecting the borrower does not end the guarantee.

A guarantee is not a character reference. It is a financial commitment of the same order as borrowing the guaranteed amount personally, and it should be assessed on that basis.

Legal protections for guarantors

Australian consumer credit law contains specific protections for guarantors, set out in Division 2 of the National Credit Code, which is Schedule 1 to the National Consumer Credit Protection Act 2009. The provisions include requirements as to the form of the guarantee, disclosure to the guarantor, the provision of copies of documents, a right for the guarantor to withdraw before credit is provided, limits on extending a guarantee to further advances, limitation of the guarantor's liability, and restrictions on increasing a guarantor's liabilities.

In practice the most useful of these are the following.

• Documents must be provided before signing. A guarantor is entitled to receive a copy of the proposed credit contract before being asked to sign, so that the obligations being guaranteed are known.
• A guarantor may withdraw before the credit is provided. Signing is not the point of no return; drawdown is.
• Liability is limited to the guaranteed amount. A properly drawn limited guarantee cannot be expanded without the guarantor's agreement, and the Code restricts increases in a guarantor's liabilities.

Most lenders require a guarantor to obtain independent legal advice, and many also require independent financial advice, with a certificate signed by the adviser. This requirement exists because guarantees have been set aside by courts where a guarantor did not understand the transaction or was subject to undue influence. A guarantor should treat the independent advice as a genuine opportunity to test the arrangement rather than a formality, and should attend without the borrower present.

A guarantor who believes a lender did not meet its obligations when the guarantee was taken may complain to the Australian Financial Complaints Authority, which is free for consumers. AFCA publishes an approach document on complaints lodged by guarantors, which sets out what it considers when deciding whether a financial firm fulfilled its obligations in accepting a guarantee, and notes that where those obligations were not met it may decide the firm cannot rely on the guarantee.

Who can be a guarantor

Lender policies differ, but the common requirements are that the guarantor is a close family member, most often a parent, that they own property in Australia with sufficient equity, and that they have the capacity to meet the guaranteed amount if called upon.

Age is a practical constraint. Lenders are cautious about guarantees from older owners approaching or in retirement, because an enforcement event could leave a person without an income unable to meet the obligation. Some lenders decline guarantees from applicants above a certain age, others require evidence of income or assets sufficient to cover the guarantee, and some will require the guarantee to be structured so it can be released on a defined event. A guarantor whose only substantial asset is the home they live in should think very carefully, and take the independent advice seriously.

Some lenders will also accept a guarantee from a sibling, grandparent or, less commonly, another relative. Guarantees from unrelated parties are rare.

A worked example

The following figures are illustrative only. Assume a buyer purchasing at $700,000 with $20,000 saved, which is not enough to cover transfer duty and costs, let alone a deposit. The parents own a home worth $900,000 with a remaining mortgage of $250,000.

Item	Amount
Purchase price	$700,000
Buyer's savings applied to costs	$20,000
Loan required	$700,000
Lender advance against the purchased property at 80 per cent	$560,000
Shortfall to be covered by the guarantee	$140,000
Parents' equity before the guarantee	$650,000
Parents' equity remaining unencumbered after the guarantee	$510,000
Indicative mortgage insurance avoided	about $19,000 to $24,000

Two points follow. First, the parents have not given $140,000 away; they have placed $140,000 of their equity at risk, and it is only lost if the borrower defaults and the property sells for less than the debt. Second, their own borrowing capacity is reduced by the contingent liability until the guarantee is released. The home equity calculator can be used to see how much usable equity a guarantor has before a guarantee is contemplated.

Releasing the guarantee

A guarantee is intended to be temporary, and planning the exit at the outset is the single most useful thing a family can do. Release generally becomes possible when the loan falls to 80 per cent or less of the value of the purchased property alone. That happens through some combination of three things.

• Principal repayments. Reliable but slow in the early years, because most of an early repayment is interest. Extra repayments accelerate this materially.
• Capital growth. Outside the borrower's control and not assured.
• A lump sum. A gift, an inheritance or accumulated savings applied to the loan.

Release is not automatic. The borrower must apply to the lender, which will usually require a fresh valuation of the purchased property, and will reassess serviceability. Valuation is the step most often underestimated, and the guide to property valuations for home loans explains the types used and what to do if the result is low. Families should agree at the start on a target date or a target loan balance, and review progress annually.

What happens if the borrower defaults

Enforcement is not immediate, and the sequence is worth knowing because it shows where a family can still intervene. A lender that is not being paid will ordinarily contact the borrower, and the borrower may give a hardship notice under section 72 of the National Credit Code, which requires the lender to consider varying the contract. The options available are set out in the guide to financial hardship assistance.

If the arrears are not resolved, the lender issues a default notice giving the borrower a period to remedy the default before enforcement proceeds. A guarantor is generally entitled to be notified as well, and at that stage may choose to pay the arrears directly to preserve their own position. Only if the default is not remedied does the lender move to take possession and sell the purchased property. The guarantee is called on last, and only for any shortfall remaining after that sale, up to the guaranteed amount.

The practical lesson is that a guarantor who learns of difficulty early has options that a guarantor who learns of it at the enforcement stage does not. Families using a guarantee should agree at the outset that the borrower will tell the guarantor promptly if repayments become difficult, and both parties may wish to ask the lender whether the guarantor can be recorded to receive copies of arrears correspondence.

Alternatives to consider first

A guarantee is one option among several, and it is the one that transfers the most risk to a third party.

• The Australian Government 5% Deposit Scheme. Eligible buyers purchase with a 5 per cent deposit and no mortgage insurance, with no income caps and no limit on places since October 2025, subject to property price caps. This achieves a similar outcome with no family exposure, and is covered in the guide to the 5% Deposit Scheme.
• A gift. A parent who can afford to give or lend funds outright gives up a known amount rather than accepting an open contingent liability. Lenders generally require a statutory declaration that a gift is unconditional and not repayable.
• A documented family loan. Possible, but lenders will usually treat a repayable loan as a commitment in serviceability, which reduces borrowing power.
• Paying the mortgage insurance premium. Sometimes the simplest answer. A premium of $20,000 capitalised into the loan is a known cost, where a guarantee is an unknown risk carried by someone else.
• Buying a less expensive property. The property affordability calculator shows the price at which no assistance is required.

Questions a prospective guarantor should ask

Before signing, a guarantor should have clear written answers to the following.

• What is the exact guaranteed amount, and is it capped in the documents?
• Under what circumstances can the lender call on the guarantee, and what notice will be given?
• Can the guarantee be extended to future borrowings by the borrower without my consent?
• What are the precise conditions for release, and what will the process cost?
• How will this affect my ability to refinance, borrow or sell my own home?
• If the borrower's circumstances change, what are my options?
• Can I afford to pay the guaranteed amount from my own resources if required?

If the answer to the last question is no, the guarantee should not be given, regardless of how unlikely the family considers default to be. A guarantee that could only be met by selling the guarantor's home is a guarantee of the guarantor's home.

Guarantees have allowed many households to buy years earlier than they otherwise could, and in most cases they are released without incident. They also transfer genuine risk between generations. Both parties should obtain independent legal advice, and a guarantor should obtain independent financial advice as well. This article is general information and does not take account of individual circumstances. Families weighing a guarantee against the alternatives may request a free assessment from an accredited broker, or read the wider first home buyer guide.