Guarantor loan
A loan where a family member offers equity in their own property as additional security.
A guarantor, usually a parent, pledges part of the equity in their home as security for a portion of your loan. That extra security lowers the effective LVR and can remove the need for LMI entirely.
The guarantee is generally limited to a specific amount rather than the whole loan, which caps the guarantor's exposure. It can be released once you have built enough equity.
The risk is real. If you default, the lender can pursue the guarantor's property. It also reduces their own borrowing capacity while the guarantee remains in place.
Guarantees are typically limited rather than unlimited, covering only the amount needed to bring the loan to 80% of value. Confirming that limit in writing is essential, since an unlimited guarantee exposes the guarantor to the entire debt.
Skipping LMI entirely
A buyer with a 5% deposit would normally face substantial LMI. A limited guarantee over 15% of the value brings the effective LVR to 80% and removes the premium.
The bit people get wrong
A guarantee is not a formality. Guarantors should get independent legal advice, and lenders usually require it, because the arrangement puts the family home genuinely at risk.
Common questions
When can the guarantee be released?
Once your loan falls below 80% of the property's value through repayments or growth. It requires a revaluation and a formal application to the lender.
Who can be a guarantor?
Most lenders restrict it to immediate family, usually parents, and require them to have sufficient equity and often to be still working.
Does it affect my parents' borrowing?
Yes. The guaranteed amount is treated as a contingent liability, reducing their own capacity until the guarantee is released.