Buying with a guarantor: how a family guarantee actually works

The "bank of mum and dad" covers several things. Sometimes parents gift money, sometimes they loan it, and sometimes they hand over no cash at all but instead offer their own property as security. That last one is a guarantor loan, and it works differently, because the risk sits with the guarantor in a way that isn't obvious from the outside. This is part of our first home buyer guide.

What it actually is

When a lender asks for a guarantor, they want additional security. Instead of a larger deposit from you, a family member (usually a parent) uses the equity in their own property to back part of your loan. They aren't giving you money or co-borrowing; they're offering their property as collateral for a portion of your debt. If you repay without problems, their property is never touched. But if you default and the lender can't recover enough from selling your property, they can call on the guarantee and pursue the guarantor's. That's a significant exposure, and the reason the arrangement has to be understood clearly first.

Why lenders offer it

Lenders measure risk by loan-to-value ratio (LVR), and a loan above 80% attracts lenders mortgage insurance (LMI), which can add thousands. A guarantee brings the effective LVR under 80% by letting the guarantor's equity stand in for the deposit you don't have yet. For example, on a $700,000 purchase with $50,000 saved (about 7%), you'd normally pay LMI; if a parent guarantees $90,000 of their equity, the combined security brings the LVR to 80% and LMI isn't charged.

Most family guarantees are limited, covering a specific amount rather than your whole loan, and can be released once you've paid down enough that your property alone is under 80% LVR. An unlimited guarantee exposes them to your entire debt, which is far more serious, so always check which type the lender is asking the guarantor to sign.

Who can be one, and the legal advice

Lenders generally require a close family member, usually a parent (siblings or grandparents in some cases, often with age limits), with enough usable equity in their own property. Beyond eligibility, they have to genuinely be willing, and the family dynamics can make that harder than it looks.

Independent legal advice for the guarantor is not optional: most lenders require them to get it before signing and to provide a certificate confirming it. A separate solicitor (not the one handling your purchase, the independence is the point) explains what happens if you default, how the guarantee is released, their options if they need to sell their own property while it's in place, and whether it affects their future borrowing. The borrower usually covers this cost.

Releasing it, and the meantime

The goal is to release the guarantee as soon as reasonably possible: once your loan is paid down or your property has risen enough that your LVR alone is under 80%, you apply, the lender revalues, and if the numbers stack up they release the security over the guarantor's property. That might take a few years with steady repayments and rising values, longer in a flat market. While it's in place, their property is encumbered, so they shouldn't sell without arranging release or substitute security, refinancing gets more complex, and some lenders treat the guaranteed amount as a contingent liability against their own pre-approval.

For the borrower, this isn't just a financial transaction: a family member is putting their home at risk for you. Make sure they genuinely understand the exposure rather than agreeing to be supportive, have a plan for a lost job or a relationship breakdown, keep them informed if your situation changes, and aim to release the guarantee as soon as you have the equity to.

A simpler alternative

If you're a first home buyer, the federal First Home Guarantee lets eligible buyers purchase with a 5% deposit and no LMI, with the government acting as guarantor so no family member's property is at risk. It has price caps, income limits, and limited places each year, but if you qualify it can be simpler than a family guarantee, and worth checking before you ask a relative.

The exact structure varies between lenders, so your broker can walk through the numbers. Done with genuine understanding on both sides, a family guarantee can be a practical way into a property sooner. The key is that the understanding is real before anyone signs.

Sources

• ASIC's Moneysmart: Going guarantor on a loan: the federal consumer regulator's explanation of what a guarantor is liable for, the risks, and the importance of independent advice before signing.
• Housing Australia: First Home Guarantee: the federal scheme where the government acts as guarantor, so no family member's property is at risk.

Sources verified 25 July 2026. Guarantee structures and lender requirements vary; the guarantor should get independent legal and financial advice before signing.