What is a guarantor loan and how does it work in Australia?

Mechanic: lender approves the loan against two securities, your purchased property + a slice of the guarantor's property. The guarantor's pledge is typically the gap between 80% LVR + 100% (or 105% to cover stamp duty + costs). Once your loan amortises down to 80% LVR on your property alone, the guarantor's security is released, usually 3-7 years.

Risk to guarantor: if you default, the lender can pursue the guarantor's pledged amount, including selling their property if necessary. ASIC requires the guarantor to receive independent legal advice + acknowledge they understand the risk. NSW Banking Code requires the lender to disclose worst-case scenarios in writing. Guarantors over 65 receive additional scrutiny.

Best-practice scoping: cap the guarantee at the smallest amount that gets the loan approved, typically 20% of purchase price + stamp duty, not the full loan. Never use a 'limited guarantee' that's open-ended. Get the guarantee documented as a one-time security pledge, NOT a co-borrower position (co-borrower = full liability for the entire loan).

When it's worth it: high-income earners with insufficient deposit (typical first-home-buyer pattern). When it's not: guarantor's retirement security depends on the pledged property; relationship strain is foreseeable; you're borrowing more than you can comfortably service even at the contracted rate. Talk to a broker who's done multiple guarantor structures, policies vary materially across lenders (some require the guarantor's property to be unencumbered; others allow second-mortgage pledges).