Guarantor

Plain-English definition. A guarantor is someone — usually a parent — who pledges their own property's equity as additional security for your home loan, allowing you to borrow more, avoid LMI, or both.

How it works in Australia. A "family guarantee" or "security guarantee" is structurally a limited mortgage over a portion of the guarantor's home. The bank takes a registered second mortgage on the guarantor's property covering, say, 20% of the new purchase price — enough to keep the borrower's combined LVR under 80%. The guarantor doesn't lend cash, but their property is on the line if the borrower defaults. Most major banks offer this product. ASIC's Moneysmart guarantor guide outlines the legal risks. Independent legal advice for the guarantor is mandatory.

Concrete example. Children buying a $700,000 first home with a $35,000 (5%) cash deposit would normally need LMI of about $25,000. Instead, the parents — who own a $1.2m home outright — pledge $140,000 of their equity as a limited guarantee. The bank treats the loan as 80% combined LVR, no LMI applies, saving $25,000. Once the child has paid down enough that the original loan is below 80% of the new home's value, the guarantee can be released.

Common confusion. Guarantors think they're only liable if the borrower defaults and the property is sold for less than the loan. True — but if that happens, the bank can pursue the guarantor's home for the shortfall up to the guaranteed amount. Going guarantor is genuinely risking your house. Pensioners with no income to refinance into are particularly exposed.