The property market is increasingly competitive. If you want to get on the first rung of the ladder, it’s worth considering a guarantor loan. This kind of loan can help you get into your first home faster – so let’s look at how it works, and if it’s right for you.

What is a guarantor loan?

A guarantor home loan is an excellent option for those who either can’t, or don’t want to, secure a home loan solely in their own name. The guarantor, a home owning third party, steps in to provide the equity in their home as collateral for the purchaser’s loan. This means that if the purchaser defaults on their mortgage, the guarantor will be expected to make the repayments on their behalf. In this way, the bank’s risk is mitigated, and they are more comfortable taking on what would otherwise be considered a risky loan.

If you’re interested in securing a guarantor loan, Freedom Finance Group, your trusted mortgage broker in Sydney can help. With access to 50+ lenders and significant experience in everything from first home buyers schemes, to guarantor loans Australia, we can make the process simple – getting you on the property ladder sooner.

How do guarantor loans work?

A home loan guarantor is just what it sounds like – it’s a guarantee for the bank.

Having a home-owning person guarantee your loan reduces the risk for the bank, and means they are more likely to accept low or no deposit loans. With a guarantor, lenders are also more likely to give out loans to people who might otherwise struggle to secure one on their own. This includes young, or recently employed people, those with a poor credit history or those with minimal savings.

Who can be a guarantor?

A guarantor is typically a close family member who uses their own home equity to help someone else (usually a first-home buyer) secure a mortgage. Banks have different rules, but in most cases, the following people can be a guarantor:

Parents – Most commonly accepted by lenders

 Siblings – Some banks allow siblings if they meet financial criteria

Grandparents – Often accepted, but policies vary

Spouse or de facto partner – Usually accepted, but both must be on the loan

 Other close family members (e.g., aunts, uncles) – Less common, but some lenders may approve on a case-by-case basis

Generally, the following people are ineligible to be a guarantor:

  Friends or work colleagues

  Business partners (unless under specific commercial lending arrangements)

  People who don’t own a property or don’t have sufficient equity

  Those with poor credit history or a history of financial instability

Guarantor loan requirements Australia:

For most major banks, like Commonwealth, ANZ, NAB, and Westpac, home loan guarantor requirements align. Let’s have a look at some of the rules for loan guarantors.

In general, you must:

·       Own a house, with sufficient equity to cover the deposit on the new home

·       Be on schedule on your own home loan repayments

·       Have a strong credit history, showing lenders that you’re financially responsible

·       Meet the bank’s age and income requirements, ensuring you can step in if needed

To avoid complication, banks often prefer a direct family member, like a parent.

How much can I borrow with a guarantor?

With a guarantor, you can borrow up to 100% (or even 105%) of the property’s value—meaning you can cover not just the purchase price but also closing costs like stamp duty and legal fees, without needing a cash deposit.

The amount you can borrow is expressed as LVR, or loan-to-value ratio. This is the ratio of the loan amount compared to the appraised value of the property you want to buy. For example, if you’re buying a home worth $500,000, and you need to borrow $400,000, the LVR would be 80% ($400,000 divided by $500,000).

With a guarantor loan, the LVR can be higher than is normally accepted because the guarantor’s equity helps to cover the deposit. This could allow you to borrow a larger percentage of the property’s value.

How long does a guarantor stay on a mortgage?

In general, guarantors remain attached to a loan for 3-5 years. This is how long it takes, in most cases, for the home purchaser to save up sufficient equity to take on the loan under their own name. The goal is to own 20% of the home, which can happen through making repayments, or by the home appreciating in value. This is the amount that those without a guarantor would normally put down as a deposit, so you can think of it as a deposit that you’re saving after the purchase date.

What does a guarantor need to provide for a loan?

A guarantor needs to provide evidence of:

·       Home ownership, and a property valuation

·       A record of consistent repayments

·       Sufficient equity in the property, proportionate to the value of the new house

·       Stable income

·       Passport, driver’s licence, or other valid ID

Do you need a deposit with a guarantor?

Getting a home loan with guarantor means it’s possible to purchase a home without a deposit, but we usually advise that you save at least a small deposit if you can. This is because it reduces the amount of paperwork (and time) it will take to secure the loan, and because you’re likely to secure a better rate if you’re able to save even 5%.

Pros and cons of guarantor loans

As with any financial decision, there are upsides and downsides. How important any of these factors are will depend on the financial situation – both of the person taking out the loan, and the guarantor putting their home on the line.

Here are some pros and cons of buying a house with a guarantor:

Pros of a guarantor loan	Cons of a guarantor loan
·       You can purchase a house with little to no deposit	·       You are involving a third party, which can be a risk for them
·       Because you don’t need to save for years, you may be able to access the property market at a more opportune moment	·       You may pay a higher interest rate as a result of having low to no deposit
·       Avoiding Lenders’ Mortgage Insurance (LMI) can save you tens of thousands of dollars.	·       If your guarantor wants to sell their home or refinance their own loan, being tied to your mortgage could complicate things for them.
·       Your borrowing power may increase, allowing you to buy a better home than you could afford on your own	·       If property values drop, your guarantor could still be liable for any shortfall if you sell at a loss.
·       It’s possible (and advisable) to remove the guarantor after a few years, in order to make the loan your own	·       You may have to refinance within a few years to remove the guarantor from your mortgage

How to apply for a guarantor loan:

Applying for a guarantor loan isn’t all that different from a regular home loan, but there are a few extra steps—mainly because the bank needs to assess both you and your guarantor.

Here’s how it works:

First, make sure you and your guarantor are both eligible. You, as the borrower, will need stable income, a decent credit history, and the ability to meet repayments. Your guarantor needs to own property with enough equity and be financially secure.

Once that’s sorted, it’s time to choose a lender. Not all banks offer guarantor loans, and the ones that do can have different requirements. Some will allow a limited guarantee—meaning your guarantor is only responsible for a portion of the loan—while others may require a full guarantee. Most lenders require your guarantor to get independent legal and financial advice. This is to ensure they fully understand the risks involved.

Next, it’s paperwork time. The bank will ask for documents from both you and your guarantor. You’ll need proof of income, employment details, and your credit history, while your guarantor will have to provide mortgage statements, proof of ownership, and financial documents to show they can handle the responsibility.

Once you’ve gathered everything, you’ll submit your application. The bank will do its usual checks—assessing your ability to repay the loan, reviewing your guarantor’s financial position, and possibly arranging a valuation of their property.

Once everything is signed off, the funds are released, and you’re officially on your way to owning your new home.

If this process sounds daunting, you’re not alone. Freedom Finance Group can help – for over 15 years, we’ve worked closely with homeowners and investors, helping them get the absolute best rates on their loans.

Get in touch today for a free consultation, or visit our mortgage brokerage in Penrith.

FAQs

Does your credit score go down if you are a guarantor?

Your credit score is safe as long as the borrower stays on top of their repayments. In fact, the loan itself won’t even appear on your credit report unless the borrower starts missing repayments. But that’s where things get tricky.

If the person you’re guaranteeing struggles to make their repayments, the bank will come knocking on your door. If the loan falls into default and you have to step in to cover repayments, that financial activity could affect your credit score. Worse still, if you’re unable to pay and the bank takes legal action, that could leave a serious mark on your financial record.

Even if everything goes smoothly, being a guarantor can still impact your ability to borrow in the future. Lenders factor in your guarantor obligations when assessing your borrowing power, so if you plan to take out a loan yourself—whether it’s for a car, home, or investment—having a guarantor loan in your name could reduce how much you can borrow.

Can a guarantor loan be declined?

Like any loan, a guarantor loan can be declined. If the bank is unhappy with the financial security of the guarantor, or the amount of equity they own in their own home, they may decline the loan. Additionally, with or without a guarantor, the home purchaser will still need to prove that they are both financially secure and responsible enough to make the repayments on their own. To determine if this is the case, the bank will review your past financial activity, your employment and income, and your credit score.

Which banks do guarantor mortgages?

Almost all major Australian banks offer guarantor home loans to help buyers enter the property market sooner. Here are some notable examples:

• ANZ provides a family guarantor home loan option, allowing a family member to use their property’s equity as additional security. This can help you avoid paying Lenders Mortgage Insurance (LMI) and purchase a home with a deposit below 20% of the property’s value.
• CommBank’s Guarantor Support enables a family member to offer their property as additional security for your loan. This support can help you secure a home loan in situations where you might not qualify on your own.
• Bankwest offers a Family Guarantee, allowing an immediate adult relative to use their home equity as security for your loan. This can help you avoid LMI and enter the property market with a smaller deposit.

Can a guarantor lose their house?

In a worst-case scenario, yes. This is just one of the reasons why guarantor loans should be carefully researched. If the home purchaser is unable to make their repayments, the guarantor will be asked to step in. They will need to make repayments on the purchaser’s behalf. If, for whatever reason, this can’t be done, then the bank will look at additional ways to recoup their losses. This may include the seizure of the second property, and – in rare cases, when this is not enough to repay the debt – the seizure of the guarantor’s property. While this is a scary thought, it is by no means a common outcome and there are many measures taken before it comes to this.

What if the guarantor cannot pay?

The lender could take legal steps to recover the money, which might include suing the guarantor for the debt. This could lead to the guarantor’s assets being seized to cover the loan. If the guarantor cannot pay and legal action is taken, it may impact their credit score, making it more difficult for them to borrow money in the future. If both the borrower and guarantor are unable to make payments, the lender may start debt recovery proceedings, which could result in the property being sold to pay off the loan.

Can I remove myself as guarantor?

Yes, but the borrower will need to prove to the lender that they can manage the loan on their own. This might mean refinancing in their own name, or increasing their equity or income so that the bank feels confident they can meet the repayments without a guarantor.

Banks are risk-averse, so removing yourself as a guarantor will mean demonstrating that the borrower can be relied on. If the borrower is unable to take on the full responsibility of the loan by themselves, the bank may not agree to release you.