With housing affordability still a hot topic in Australia, more families are turning to guarantor loans to help loved ones secure a home or personal loan. If you’re considering acting as a guarantor, or you’re thinking about asking someone to back your application, it’s crucial to understand how the process works, what’s changed in 2025, and the real-world implications—before you sign the dotted line.
What is a Guarantor and How Does It Work?
A guarantor is someone who agrees to repay a loan if the primary borrower can’t meet their obligations. In Australia, guarantors are most commonly used for home loans, but can also back personal or business loans. Typically, parents guarantee their children’s mortgages by offering their own property as security, making it easier for first-home buyers to access finance or avoid lenders mortgage insurance (LMI).
- Family pledge: Most major banks now offer ‘family guarantee’ products designed for parents helping children enter the property market.
- Security, not cash: The guarantor usually provides equity in their home, not cash, as security for the loan.
- Partial guarantees: It’s increasingly common to guarantee only a portion of the loan (e.g. 20%), limiting the guarantor’s risk exposure.
For example, if you’re buying a $700,000 home with a 10% deposit, your parent could guarantee the remaining 10% to reach the standard 20% deposit threshold, helping you avoid expensive LMI premiums.
Guarantor Risks and What’s Changed in 2025
While being a guarantor can help a loved one get ahead, it’s not a decision to take lightly. As of 2025, several regulatory updates have been introduced to offer more protection for guarantors, following ASIC and APRA concerns about families facing financial strain from guarantees gone wrong.
- Stricter lending criteria: Lenders must now provide clear, written explanations of the risks and ensure the guarantor receives independent legal and financial advice before signing.
- Cooling-off periods: New legislation effective January 2025 requires a mandatory three-business-day cooling-off period for all new guarantor agreements.
- Credit checks: Lenders are now required to assess the guarantor’s financial position more thoroughly, including running credit checks and confirming sufficient equity or assets.
Risks include:
- Being liable for the loan if the borrower defaults—potentially losing your own home if you’ve secured the guarantee against it.
- Impacts on your own borrowing power (e.g. refinancing or taking out new loans may be more difficult).
- Strained family relationships if things go wrong.
In 2025, the focus is squarely on responsible lending and informed consent, with lenders facing penalties for failing to protect guarantors.
How to Protect Yourself as a Guarantor
If you’re considering becoming a guarantor, preparation is key. Here’s how you can reduce your risks:
- Seek independent legal and financial advice to understand all obligations and consequences.
- Limit your liability—where possible, guarantee only a portion of the loan (not the full amount).
- Stay informed—ask for regular updates on the loan status and repayment history.
- Have an exit plan—discuss with the lender how and when the guarantee can be released (e.g. when the borrower has repaid a certain amount or the property value has increased).
Realistically, acting as a guarantor is a significant financial decision that requires trust and open communication with the borrower. It’s not just a signature—it’s a legal commitment with lasting consequences.
Guarantor Alternatives in 2025
With new government schemes and lender incentives, there are now more ways to help someone get a loan without putting your own assets at risk:
- First Home Guarantee (FHBG): Expanded in 2025, the FHBG helps eligible first-home buyers purchase with as little as 5% deposit—no guarantor required.
- Shared equity schemes: Several states, including Victoria and NSW, now offer shared equity programs that reduce the upfront deposit burden.
- LMI waivers: Some lenders are waiving LMI for select professions or low-risk borrowers, making it easier to buy with less than 20% deposit.
It’s worth considering these alternatives before locking yourself into a legal commitment as a guarantor.
