What Is A Guarantor Loan

A guarantor loan is a beneficial option that involves a guarantor, an individual other than the borrower, who provides extra security for the loan. This can significantly lower the costs associated with Lenders Mortgage Insurance (LMI) and enhance loan accessibility for the borrower. One notable type of guarantor arrangement is a limited guarantee, wherein the guarantor's financial responsibility is capped at a specific amount or percentage of the loan. While both types of guarantees ensure that a third party commits to repaying the loan in case of borrower default, the key distinction lies in the scope of the guarantor's financial obligation. Overall, these options can provide a safety net for borrowers while making loans more attainable.

Be mindful that both you and the guarantor must meet the lender's criteria, which includes income and credit checks. I will guide both you and your guarantor through the process clearly and carefully, making sure everyone understands the responsibilities and benefits.

Depending on the lender's criteria, having a guarantor can allow you to borrow more than a standard loan, sometimes up to 110% of the property's value. Which means that you can cover the purchase price, plus upfront costs such as stamp duty, legal fees, and inspection fees.

• The full purchase price of the property (100%)
• Government costs such as stamp duty and legal fees (5–10%) 

Key benefits of maximising your borrowing:

✅ Avoid Lenders Mortgage Insurance (LMI) — even with less than a 20% deposit
✅ Cover upfront costs like stamp duty, legal fees, and moving expenses
✅ Keep your savings intact for renovations, furnishings, or an emergency buffer

Your borrowing capacity still depends on your income, credit history, and ability to repay.

For a lender to accept a guarantor, they typically require that the guarantor:

✅ Must be an Australian citizen or permanent resident (temporary residents considered, case by case).

✅ Owns a property in Australia, preferably with at least 20–30% equity after accounting for their loan
✅ Has a strong credit history and stable financial position (good income, low liabilities)
✅ Understands the risks clearly, including the possibility of covering repayments if needed
✅ Obtains independent legal advice (mandatory with most lenders) to confirm they understand their obligations
✅ Is an immediate family member — usually parents, but some lenders accept siblings, grandparents, or even de facto partners’ parents (case by case)

The Situation

Sarah is a 29-year-old professional earning $97,000 p.a. She wants to buy her first property in Melbourne priced at $650,000.
She has $15,000 in savings, enough to cover some upfront costs but not a 5% deposit. 

Her parents own their home, valued at $950,000, with $200,000 remaining on their mortgage. They’re happy to help but cautious about overcommitting.

The Solution 

We structure a limited guarantee where Sarah’s parents secure $130,000 of equity, enough to cover a 20% deposit of the purchase price.

Sarah’s loan breakdown:

• $650,000 - Purchase price
   
• $15,000 - Stamp duty & legal fees (approximate)
   
• $665,000 - Total required

Sarah’s loan covers the full $685,000, but her parents’ guarantee is limited to $130,000. Sarah will use her $15,000 savings to cover the upfront costs.

We ensure both Sarah and her parents receive independent legal advice to fully understand the arrangement.

The Result

✅ Sarah buys her property without paying $18,000 in LMI
✅ Her parents’ risk is limited to $130,000
✅ After 4–5 years, Sarah’s property value rises, and her loan reduces. We refinance and release her parents as guarantors, removing their obligation.