How a guarantor helps you buy your first home or investment property

A deposit gap is not a verdict on whether you can buy. It is a structural problem, and a guarantor home loan — sometimes called a Family Pledge — is one of the cleaner ways to solve it. The arrangement lets a family member, and in some cases another person close to you, pledge equity in their own property as security for part of your loan. The borrower still services the debt; the guarantor's property simply covers the shortfall a deposit would otherwise fill.

This is the only structure that lets you borrow between 100% and 110% of a property's purchase price. The mechanics are straightforward: roughly 80% of the loan sits against the property you are buying, and the remaining portion is secured by the guarantor's property. Done this way, a guarantor loan can cover the full purchase price, stamp duty and other costs — and in some cases consolidate existing debt or fund moving expenses — without the deposit you would normally need.

How much you can borrow depends on what you are doing:

These are indicative bands, not guarantees — each lender sets its own policy, and many apply additional credit criteria once the loan moves above $1,000,000. The question is which lender's policy fits your circumstances and how the loan is structured around it.

How the guarantee is structured

The loan is secured by two properties: the one you are buying and the one your guarantor offers as security. How much of the guarantor's property is exposed is the part worth getting right.

We generally recommend a limited guarantee, which caps the guarantor's liability to a defined portion of the loan rather than the whole debt. This limits the guarantor's exposure to a fixed amount instead of leaving their home on the hook for the full balance. The cap is calculated against the loan size, the security on offer and the guarantor's available equity, and it is the single most important protection in the arrangement. Factors such as debt consolidation, the type of security property, your genuine savings position and whether it is a construction loan all change the figure, so the calculation is worth doing properly rather than by rule of thumb.

If you are being asked to act as a guarantor, the obligation deserves the same diligence as taking on the loan yourself — understand exactly what is being secured before you sign.

The types of guarantee

There are four arrangements lenders commonly use, and the right one depends on the borrower's position and the guarantor's appetite for risk.

Security guarantee. Most often used when a first home buyer with a strong credit history has no deposit but can comfortably service the loan. The guarantor provides additional property security only. Some lenders call this person an equity guarantor.

Security and income guarantee. Often used by parents helping a child on a lower income. The lender uses the parents' property as additional security and counts the parents' income to demonstrate the loan is affordable.

Limited guarantee. As above, only a defined part of the loan is guaranteed. This is most often paired with a security guarantee to reduce the liability secured against the guarantor's property. A guarantee can be limited or unlimited depending on both the guarantor and the lender's requirements; limited is almost always the more disciplined choice.

Family or parental guarantee. Sometimes called a Family Pledge, this is where the guarantor is directly related to the borrower — usually a parent. Grandparents, siblings and other family members are considered on a case-by-case basis, and policy varies between lenders.

Common questions

Can I use a guarantor for a second home? Yes — guarantors are not limited to first home buyers. Lenders will, however, expect you to be in a strong financial position. There are usually a few lenders whose policy fits a second-home scenario, and the task is to match you to one of them.

Do I need genuine savings? Most lenders still want to see genuine savings of around 5%, though there are exceptions. Lenders back their lending with a risk assessment, and a high-income, low-asset position generally reads as higher risk than a younger couple who have demonstrably saved toward a first home. In some cases rent can count as genuine savings, on the logic that rent paid would otherwise have been saved — but not every lender accepts this.

Can I buy an investment property with a guarantor? Some lenders will, but they are the exception rather than the rule. Guaranteeing multiple investment properties is generally not permitted, because it concentrates too much risk on the guarantor.

Is it a problem if my guarantor still has a home loan? No, provided there is enough equity. Your guarantor can carry their own mortgage and still offer security, but the combination of their existing debt and the limited guarantee should generally not exceed 80% of their property's value. That headroom is what keeps the arrangement workable.

What happens if I can't meet my repayments? Speak to us first, especially if the cause is hardship. A lender will generally act against your property before claiming against the guarantor, and repossession is typically not initiated for several months. There is almost always more room to manoeuvre than a missed payment notice suggests.

Can the guarantee be removed? Yes, once the position supports it. The guarantee can generally be released when you can afford the repayments without assistance and can evidence it, your loan has fallen below 90% of the property value — ideally 80% or less — and you have not missed a payment in the preceding six months or so. Once the guarantor is released, it is worth reviewing your finance to make sure the loan still suits where you have ended up.

Should I consider insurance? To protect you, your family and your guarantor, it often makes sense to consider appropriate life, total and permanent disability, and income protection cover — as with most mortgage commitments. This is general information only, not a recommendation; suitability is a matter for your licensed financial adviser. It is not a requirement of the loan, and we can help you source options if you decide to look.

My guarantor wants to sell their home. If the guarantee cannot yet be released under the criteria above, the guarantor may be unable to sell — a real constraint they should weigh before agreeing. One workaround some lenders accept is a dollar-for-dollar term deposit lodged by the guarantor in place of property security, held untouched until the guarantee can be released.

If a guarantor isn't an option

Not everyone has a guarantor available, and not every available guarantor will qualify. That does not close the door. Depending on your income and circumstances, the alternatives worth exploring include a no-deposit home loan, a non-major lender that prices the additional risk into a higher rate, a gift deposit, or buying through a co-borrower, co-ownership or cooperative arrangement.

Each of these changes the lender, the rate and the structure, so the path is worth mapping against your actual position rather than chosen by default.

A guarantor loan is a structural decision that affects two households, not just a way to get over the deposit line. It is worth setting up so the borrower's loan can stand on its own as soon as it qualifies, and so the guarantor's exposure is capped and exit-able from the start. Book a strategy session and we will work through which structure fits your circumstances.

General information only — not personal financial product or credit advice. Lending is subject to each lender's policy, your full circumstances and responsible-lending assessment. AeFin is an Australian Credit Representative (CR 464548) of Finsure (ACL 384704).