Guarantor Home Loans: How They Work (and the Risks)
How a guarantor home loan actually works, what the guarantor is really agreeing to, the real risks, and how to remove a guarantor later.
By Timothy Hirou GaschereauPublished 9 min read
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A guarantor loan can be exactly the leg-up a first buyer needs, or a genuinely risky commitment for whoever agrees to be the guarantor, often a parent. Both things are true, which is why it's worth understanding properly before either side signs anything. This is part of a wider guide to property and debt on Snowball Invest.
Quick answer
A guarantor home loan lets someone, usually a parent, use equity in their own property as extra security for your loan, instead of you needing a full 20% deposit. It typically only needs to cover the gap between your deposit and a safe loan-to-value ratio, not the whole loan, but the guarantor is legally on the hook for that portion if you can't repay.
In this guide
- →How a guarantor loan actually works, and what's being agreed to
- →The real risks, for the guarantor specifically
- →What banks are legally required to do to protect a guarantor before they sign
- →Removing a guarantor later, and alternatives worth considering first
🤝 How a guarantor loan actually works
Instead of relying purely on your own deposit, a guarantor offers a portion of the equity in their own property as additional security for your loan. This typically lets you borrow with a smaller deposit, or none at all, while still avoiding LMI, since the guarantee covers the risk that would otherwise trigger it.
Crucially, the guarantor isn't handing over cash, and they don't automatically become an owner of your property. They're putting their own home on the line as security for a specific, usually limited, portion of your debt.
✍️ What the guarantor is actually agreeing to
The guarantee usually only needs to cover the gap between your deposit and an 80% loan-to-value ratio, not the full purchase price. On a $700,000 property with a 5% deposit ($35,000), the guarantee would typically need to cover roughly the remaining amount up to the 80% mark, around $105,000, not the entire $665,000 loan.
It's a formal legal agreement between the borrower, the guarantor, and the bank, not an informal favour. Both the borrower and the guarantor are strongly encouraged, and often required, to get independent legal advice before signing.
⚠️ The real risks, for the guarantor
What it genuinely does
- ✓Helps the borrower buy sooner, often avoiding years of extra saving
- ✓Avoids LMI, which can be a real cost saving overall
- ✓The guarantor puts up equity, not cash out of pocket
What it puts at risk
- ✕The guarantor is legally responsible for the guaranteed portion if the borrower defaults
- ✕Can reduce the guarantor's own borrowing power while the guarantee is active
- ✕If the lender calls on the guarantee and the guarantor can't pay, the secured asset (often their home) is at risk
- ✕Can strain the relationship between borrower and guarantor if things go wrong
🛡️ What banks are actually required to do for the guarantor
🎯 The essential: A guarantor has specific, enforceable protections under the Banking Code of Practice, not just a general recommendation to "get advice."
Because so much can ride on a guarantee, banks that subscribe to the Banking Code of Practice, effectively all the major lenders, have specific, mandatory obligations to a proposed guarantor before a guarantee can be accepted. The bank must give the guarantor a prominent, separate notice recommending they get independent legal and financial advice, must confirm they understand the loan they're guaranteeing, must clearly tell them they're entitled to refuse, and must take reasonable steps to discuss the guarantor's obligations with them directly, in person, by phone or by video, separately from the borrower rather than only through the borrower.
A guarantor also gets a mandatory three-day cooling-off period after receiving the loan information, before the bank can formally accept the guarantee, time specifically built in to get that independent advice rather than sign under pressure in the same meeting the paperwork is presented. None of this makes the underlying risk disappear, but it means a guarantor isn't relying purely on family trust or the borrower's own summary of the loan, there's a real, code-mandated process designed to make sure they understand exactly what they're taking on before it's binding.
🔓 Removing a guarantor later
A guarantee isn't usually meant to be permanent. Once the loan balance falls to around 80% or less of the property's value, through regular repayments, extra repayments, or the property's value growing, the borrower can typically apply to have the guarantee released through a formal review or refinance with the lender. It doesn't happen automatically, it needs to be requested.
🔀 Alternatives worth considering
A guarantor arrangement isn't the only way to get around a smaller deposit. It's worth weighing against simply paying LMI on a low-deposit loan, or checking eligibility for the government's Home Guarantee Scheme, which achieves a similar outcome, avoiding LMI on a small deposit, without putting a family member's property at risk.
🏠 How Much Deposit Do You Need?
Compare the deposit paths, including government schemes, side by side.
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❓ Frequently asked questions
Does a guarantor need to give me cash?
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No, a guarantor offers a portion of their own property's equity as additional security, they don't hand over any money directly.
Can a guarantor loan cover the whole purchase price?
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No, the guarantee typically only needs to cover the gap between your own deposit and a safe 80% loan-to-value ratio, not the entire loan.
Does being a guarantor affect the guarantor's own borrowing power?
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Often yes, the guaranteed amount can be treated as a contingent liability by other lenders, which can reduce how much the guarantor is able to borrow themselves while the guarantee is in place.
What happens if the borrower can't make repayments?
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The guarantor becomes responsible for the guaranteed portion of the debt, and if they can't cover it, the lender may pursue the asset the guarantor used as security.
Is a guarantor loan the same as being a co-borrower?
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No, a co-borrower shares ownership and equal responsibility for the entire loan, a guarantor doesn't own the property, they've just offered security for part of it.
Does going guarantor affect the guarantor's credit report?
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It can. If the guaranteed debt isn't repaid, the lender may record a default on the guarantor's credit report too, not just the borrower's, which can make it harder for the guarantor to borrow in future, separate from the borrowing-power impact of the guarantee itself.
📚 Recommended reading
The Barefoot Investor
Scott Pape
Australia's best-selling money book ever. A simple system for accounts, budgeting, debt and a real emergency fund in one.
Some links above are affiliate links. If you buy through them, Snowball Invest may earn a small commission at no extra cost to you. We only recommend books we'd suggest anyway.
Sources
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Timothy Hirou Gaschereau
Founder of Snowball Invest, not a financial adviser.
I write about what I'm learning myself, because nobody ever taught us how to take control of our own money. It's a skill, not a mystery, and it's never too late to learn it. The best day to start was yesterday, the second best is today.
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