A guarantor loan can help an eligible borrower buy sooner by using limited equity in a family member’s property as additional security. It is not free money and it is not merely a signature. The guarantor accepts a legal obligation, so independent legal advice and a clear release strategy are essential.
- Use a limited guarantee where appropriate
- Guarantors need independent legal advice
- The guarantee can affect the guarantor’s own borrowing
- Set a review point for release
- Do not rely solely on expected property growth
How a limited guarantee can work
Rather than guaranteeing the entire home loan, many structures limit the guarantee to the amount needed to support the required LVR plus associated lender exposure. That can reduce the guarantor’s risk compared with an unlimited guarantee.
The exact structure depends on lender policy and the amount of supporting equity available.
Risks for the guarantor
If the borrower defaults and the lender suffers a shortfall after enforcing the borrower’s security, the guarantor can be required to meet obligations up to the guaranteed amount and terms.
The guarantee can also affect the guarantor’s own borrowing capacity and future plans.
Plan the release before settlement
A sensible strategy identifies how the guarantee might be removed — for example through principal reduction, property growth, a new valuation or refinancing once the borrower’s standalone LVR is acceptable.
Do not leave the guarantee in place indefinitely simply because nobody remembered to review it.
Frequently asked questions
Does a guarantor need to make repayments?
Not while the borrower performs under the loan. The guarantor’s obligation arises under the guarantee terms if required.
Can the guarantee be removed later?
Yes, subject to valuation, loan balance, servicing and lender approval.
Can parents use an investment property as guarantee security?
Sometimes, depending on lender policy and the property involved.