Guarantors gone wrong: What’s really at risk?

If you’re looking to get into the property market in 2025 but your deposit isn’t quite there yet, a guarantor loan could be just the ticket to help you secure a mortgage.

Guarantor loans are becoming increasingly common. PropTrack shows the housing market has exploded in recent years, with median house prices now at $796,000.

With most lenders requiring a 20% deposit of the property’s value, the Australian Bureau of Statistics estimates that the average home loan deposit is $197,000. It’s a lot to try and scape together, particularly if you’re renting.

The other way to get into the property market quicker is to find someone who will agree to go guarantor for your home loan, even if you have a small deposit.

What is a guarantor home loan?

Having a guarantor over your home loan means they agree to provide a guarantee to your lender for the loan by offering up something of theirs as security. The guarantee usually owns a home, and will offer up a portion of their equity as guarantee to your lender.

Bear in mind that most lenders that offer guarantee home loans offer some flexibility.

For example, your guarantor may select to guarantee a specific portion of your loan, such as just the initial deposit of 20%. This can help first home buyers avoid having to take out Lenders' Mortgage Insurance, which is an insurance policy that protects the lender from any loss they may incur if a borrower defaults on their home loan.

How does it work?

A guarantor home loan works like normal home loans, but there is a guarantee that provides security for the loan.

The guarantor doesn’t have to stump up any cash. Instead, they are offering up additional security that can help you secure your loan, which can boost your deposit up to 20% or more. 

The home buyer will still be responsible for making regular home loan repayments.

Understanding the commitment before proceeding is important.

Zippy financial director and principal broker Louisa Sanghera says parental and family guarantor arrangements have been increasingly popular in recent years, but warns parents to go into the agreement with eyes wide open.

“Guarantees come with potential positives and negatives for both parties, which means everyone needs to understand the commitment they are undertaking.

What is a guarantor?' youtube.com/mortgagechoice

“If a mum or dad has $500,000 equity in their home, this equity can be used as security against their child’s mortgage,”

“Of course, there are pros and cons with using this mortgage facility, which I always recommend everyone understands thoroughly before proceeding with this option.

The benefits

One of the benefits is that the borrowers won’t need as big a deposit as they are using their parents or family member’s property as security.

There is also no cost to the guarantor – as long as the mortgage holder always makes their mortgage repayments on time.

And once the mortgage holder has built up enough equity in their home or has paid off enough of the mortgage to get an 80% Loan to Value Ratio, the guarantor can be released from the agreement.

The risks

Of course, there’s a downside. If the mortgage holder defaults on the loan, the guarantor – parents or family member – is liable for the entire sum that they have promised to cover.

“This means that the guarantor’s ability to take on further loans for themselves or for guaranteeing others is diminished during the guarantee period. The guarantee may also be putting their own home at risk if the mortgage holder defaults on their home loan and they are unable to repay the initial sum guaranteed,” Sanghera says.

Also, bear in mind that the loan could end up costing you more. If you use a guarantor to buy, the home loan could cost you more because you will be paying interest on a larger portion of the property value over the lifetime of the loan.

What to consider

Think very carefully before going down this path. You’re going to have to have a strong relationship with the guarantor, and they’re going to need to trust that you’re able to cover the loan. That means they are probably going to want to know what you earn, what your expenses are and how much your loan will cost you each month.

Many first home buyers are using guarantors to be able to get into the increasingly competitive housing market. Picture: Getty

The relationship between you and your guarantor could be put under pressure if you miss a repayment, because it will put a significant financial strain on them. Their ability to take out a subsequent loan could also be diminished while they are acting guarantor for you.

The guarantor will also need to have a strong credit history, while the lender is also going to want to see proof of their income and a valuation of their home.

Other avenues

Asking someone to be a guarantor is a tall order, and not everyone has someone in their lives prepared to go guarantee. If that’s you, consider looking into Housing Australia’s Home Guarantee Scheme, which supports eligible home buyers to buy a home sooner, with a deposit as little as 5%.

But you will need to meet a number of requirements to be eligible.

Nearly 200,000 people have used the scheme to secure their first home, with more than 52% of participants under the age of 30.