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Pros and cons of guarantor home loans

pros and cons home loan imageMama’s Boy? Daddy’s girl?

Once dirty words on the playground, but when it comes to securing your first home loan, all bets are off. We lay out the positives and negatives of guarantor home loans.

We all remember the school-yard taunts. In the days of brown-bag lunches and skinned elbows, being a mama’s boy or a daddy’s girl wasn’t exactly a badge of honour.

Fast-forward twenty years – you’ve locked down a great job earning a steady income and are thinking about buying your first place. The only trouble is, you’re finding it tough to save the tens of thousands of dollars needed for your deposit.

Now who wishes they were a mama’s boy?

When it comes to securing a Home Loan, a little help from your parents could be just what you need to get you over the line. Here’s what you need to know about guarantor home loans.

What is a guarantor?

Your guarantor usually is a close family member, like parents, grandparents, or siblings. They assist you in purchasing your first home by using the available equity in their property as additional security on your home loan. Guarantors come in handy when your deposit is lower than 20% of the property you want to purchase, and you can use their equity to cover the shortfall so you can avoid LMI. You can learn more about Guarantor Home Loans here.

How do guarantor home loans work?

Put simply, if you’re looking to buy and you haven’t been able to save the full deposit, you can ask your parents to use the equity in their property to help out.

So, for example, say you need a 20% deposit of $50,000 on a $250,000 property to avoid lender’s mortgage insurance. You’ve only been able to save $30,000, but you’ve calculated that you can afford the monthly repayments to service a loan this size. You can ask your parents to be your home loan guarantor by using the equity in their home to allow you to borrow the extra $20,000.

Pros and Cons of Guarantor Loans

Applying for a guarantor loan may seem like a golden-ticket to home ownership, but it's worth weighing up the pros and cons before you commit.

Yes, a guarantor loan may mean you're able to break into the market sooner, but it involves a certain level of trust and risk on the part of your guarantor, so don't take it too lightly.

The Pros

  • Get into the market sooner – Depending on how much equity your guarantor has in their home and the size of deposit your bank is willing to accept as genuine savings, you may only have to save a much smaller amount, meaning you can get your loan approved sooner and snap up the perfect place.
  • Removable down the track – As you continue to repay your loan and build your own equity, you can remove the guarantee, meaning no-one is liable for your loan but you.
  • Avoid LMI – By accepting a helping hand with your deposit, you can make sure you reach the magic 20% mark needed to steer clear of having to pay Lender’s Mortgage Insurance.

The Cons

  • Liable Guarantor – this is the one major issue with guarantor home loans. If, for whatever reason, you default on your repayments, your parents are liable for the portion of your debt they have guaranteed. We'll help avoid this by being doubly sure you can service your loan repayments before you get started. Use our repayment calculator to see what will work for you.


This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Terms, conditions, fees, charges and credit criteria apply. Information in this article is current as at the date of publication.

What it means to become a home loan guarantor

Who can be a guarantor?

A home loan guarantor is the person or persons who offer the additional security for the applicant's mortgage. In most cases, it's preferred for this to be a close relative – usually a parent, grandparent or siblings. This varies depending on the lender, so it's best to check.

What does a guarantor loan require?

This will, of course, differ between lenders, but generally you'll be asked to prove that your acting guarantor:

  • Has equity in their property and a stable income.
  • Has a good personal credit rating.
  • Is an Australian citizen or a permanent resident.
  • Is above 18 years of age.

How much equity does a guarantor need?

Although some lenders will allow up to 27% equity to be used (usually to cover home buying costs such as legal fees and stamp duty), a good yardstick is to say that your guarantor needs enough equity in their property to fund 20% of the value of the property you want to buy.

How much money does a guarantor need to earn?

Usually, lenders won't look so much at the earning capacity of a potential guarantor. 

Instead, they will consider things such as whether or not a guarantor has a satisfactory credit history.

Most importantly, however, the main factor used to determine whether or not someone can act as your guarantor is their level of equity in their property. If they own it outright, great! If not - they need enough equity to fund 20% of the value of the new property being purchased.

Do guarantors get credit checked?

Yes, indeed. Potential guarantors with a low credit score are not usually accepted by lenders.

Each lender will have their own threshold as to how high a guarantor's credit score needs to be, but they basically want to know if the guarantor has the ability to step in and pay back the loan if the borrower can't.

As a rule, however, the higher your guarantor's credit score - the better.

Does being a guarantor affect my Credit Rating?

Only in the unfortunate instance that the borrower you are acting as guarantor for is unable to meet their loan commitments.

Before you become a guarantor, lenders will complete a 'soft' credit search in your name. These checks aren't visible to other companies, so your credit score should remain unaffected.

If at any time the borrower's loan falls into default, this will appear on your credit score. If you then fail to repay the money owed, your credit rating will definitely be affected.

Does being a guarantor appear on my Credit Report?

The act of becoming a guarantor alone doesn't usually appear on your credit report. However, there are situations in which your guarantor relationship could affect your credit report:

  • If the borrower you're acting as guarantor for fails to make their repayments, the responsibility for the debt falls to you, and this will form part of your credit record.
  • By becoming a guarantor, a financial association may be made between you and the borrower. As financial associations appear on your credit report, you may find that in future, credit assessors will check the credit score of your borrower before deciding whether or not to approve you for finance.

Got questions? We're here to help

Saving a big enough deposit to buy your first home is challenging. Guarantor Home Loans could be a viable option for you to enter the property market sooner. Get in touch if you want to know more.

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