Guarantor home loan vs saving a deposit: Which saves you more money?
Buying your first home is an exciting milestone, but for many Australians, saving a 20% deposit feels like the biggest obstacle. Between rising property prices, increasing living costs, and everyday expenses, it can take years to build the savings needed to enter the property market.
The good news is that a large deposit is not the only pathway to home ownership. At ZedPlus, we helped many first-home buyers in Australia purchase sooner by using a guarantor home loan, where an eligible family member provides additional security for the loan instead of contributing cash.
But is using a guarantor actually better than saving a larger deposit for you?
In this blog post, we will compare both options, explain the benefits and risks of each, and help you understand which pathway may suit your financial situation.
Key takeaways
- A 20% deposit isn't the only way to buy your first home in Australia.
- A guarantor home loan can help eligible buyers enter the property market sooner.
- Saving a larger deposit may reduce your loan amount and long-term interest costs.
- Using a guarantor may help you avoid Lenders Mortgage Insurance (LMI).
- The right option depends on your financial circumstances and long-term goals.
What is a home loan deposit and how does it work?
A home loan deposit is the amount you contribute towards the purchase price of your property using your own savings or eligible funds. For example, if you are buying a home worth $800,000 and have saved $160,000, you have contributed a 20% deposit and will borrow the remaining 80%.
The size of your deposit influences several important factors, including:
- How much do you borrow
- Your monthly repayments
- The amount of interest paid over the life of the loan
- Whether you will need to pay Lenders Mortgage Insurance
- Your borrowing capacity
Although many people believe a 20% deposit is mandatory, that's not always the case. Many lenders accept lower deposits, while government initiatives such as the First Home Guarantee may allow eligible buyers to purchase with as little as a 5% deposit without paying Lenders Mortgage Insurance. Learn more about the different ways to avoid paying LMI charges when buying a home.
What is a guarantor home loan and how does it work?
A guarantor home loan Australia lets a family member, usually a parent, grandparent, or sibling, use the equity in their own home as extra security for your loan.
Instead of handing over cash, the guarantor agrees to offer part of their home equity to top up your deposit, which can help you buy with a smaller deposit or, in some cases, no deposit at all.
The guarantor typically stays on the loan until you have built up enough equity, often 10–20%, at which point they can be released, usually through a home loan refinancing or a property revaluation.
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Guarantor home loan vs saving a deposit example
Let's compare two first home buyers purchasing the same property valued at $850,000.
Buyer 1: Saving a 20% DepositSarah wants to purchase independently without involving her family.
- Property price: $850,000
- Deposit saved: $170,000 (20%)
- Loan amount: $680,000
- LMI: Not payable
- Time spent saving: Approximately 5 years
By the time Sarah has saved her deposit, the local property market has grown by around 5% per year. The same property is now worth approximately $1,085,000.
To maintain a 20% deposit, Sarah now needs around $217,000, which is $47,000 more than she originally planned. She also needs a larger loan because the property's purchase price has increased.
Buyer 2: Using a guarantor home loanJames has stable employment but has only saved $42,500 (5%). His parents agree to act as guarantors by using equity in their home as additional security.
- Property price: $850,000
- Deposit: $42,500 (5%)
- Guarantor provides additional security
- LMI: Often avoided
- Purchase timeframe: Immediately
Instead of waiting another five years, James buys the property straight away. During those five years, he makes regular loan repayments and benefits from the property's increase in value.
If the property grows to $1,085,000, James has not only benefited from the capital growth but has also built equity through his repayments. Once he reaches the lender's required equity level, his parents can usually be released as guarantors.
How much deposit do you actually need to buy a house in Australia?
The amount required depends on your lender, loan type, and eligibility for government assistance.
| Property Price | 5% Deposit | 10% Deposit | 20% Deposit |
|---|---|---|---|
| $600,000 | $30,000 | $60,000 | $120,000 |
| $800,000 | $40,000 | $80,000 | $160,000 |
| $1,000,000 | $50,000 | $100,000 | $200,00 |
A larger deposit generally means:
- Lower loan balance
- Lower monthly repayments
- Less interest over time
- Better lending options
- Greater chance of avoiding LMI
However, spending several years saving a larger deposit may also mean paying higher property prices in the future if the market continues to grow.
What are the pros and cons of a home loan deposit?
The table below summarises the key advantages and potential drawbacks of saving a home loan deposit.
| Pros and cons of a home loan deposit | ||
|---|---|---|
| Pros | Cons | |
| Reduces the amount you need to borrow | Can take years to save, especially with rising property prices | |
| Lowers your interest costs over the life of the loan | Rent or living costs can make saving harder | |
| Avoids Lenders Mortgage Insurance (LMI) if you reach 20% | You may miss out on properties while you continue saving | |
| No family member is financially exposed or at risk | Property prices may rise faster than your savings | |
| Full independence, no one else is tied to your loan | Requires strict budgeting and financial discipline | |
| Can improve your borrowing power and loan approval chances | Interest rates or lending criteria may change while you save | |
| Gives you a financial buffer for moving and setup costs | May require cutting back on lifestyle spending for years | |
| Builds strong money habits that help after settlement | Delays entry into the property market | |
| Puts you in a better position to negotiate with lenders | Opportunity cost of funds that could be invested elsewhere | |
Pros and cons of a guarantor home loan
The table below compares the benefits and considerations of using a guarantor to purchase a property.
| Pros and cons of a guarantor home loan | ||
|---|---|---|
| Pros | Cons | |
| A guarantor increases your chances of loan approval, even with a small down payment or poor credit, since lenders see the added security as reduced risk. | Not everyone has family or friends who are able or willing to be a guarantor, limiting access to this option. | |
| Can help buyers borrow more and afford a home that better suits their needs | Guarantor's own property or savings are at risk — the lender can pursue them for the remaining balance if the borrower defaults. | |
| Often avoids Lenders Mortgage Insurance (LMI), saving thousands of dollars | Can create financial dependency, delaying the borrower's full financial independence. | |
| May unlock a lower interest rate since the lender's risk is reduced | Financial strain from missed repayments can damage family or personal relationships. | |
| Builds the borrower's credit score through on-time repayments | Involves complex legal agreements; parties should seek legal advice to understand obligations. | |
| A guarantee can usually be removed later once enough equity is built | If the borrower defaults, it can appear on the guarantor's own credit record, affecting their future finance applications. | |
Guarantor home loan v Saving a deposit: Side-by-side comparison
Choosing between these two options isn't simply about buying sooner. It's about balancing costs, risk, and long-term financial goals.
| Guarantor home loan v Saving a deposit: Side-by-side comparison | ||
|---|---|---|
| Factor | Home Loan Deposit | Guarantor Home Loan |
| Upfront cash required | Yes, savings must be built over time | Little to no guarantor's equity is used instead |
| Time to purchase | Can take years to save | Can buy sooner, without waiting to save |
| Lenders Mortgage Insurance (LMI) | Required if the deposit is below 20% | Can often be avoided |
| Who carries the risk | Only the borrower | Both the borrower and the guarantor |
| Impact on family | None, fully independent | Guarantor's property or credit may be affected |
| Borrowing power | Limited by savings and deposit size | Can borrow up to 100% of the purchase price |
| Flexibility | Full control, no third party involved | Depends on the guarantor's willingness and financial position |
| Exit strategy | Not applicable | The guarantor is released once sufficient equity is built |
Both these options are effective, but the key is to understand which structure aligns with your financial position rather than simply focusing on entering the market quickly.
Alternatives to a guarantor home loan or saving a large deposit
The options below highlight alternative pathways that may help eligible buyers overcome deposit challenges, access additional funding, or improve their borrowing position.
- Government schemes and grants: The First Home Guarantee (FHBG) allows eligible buyers to purchase an established or new property with a deposit as low as 5%, without paying Lenders Mortgage Insurance (LMI). Another government scheme, the First Home Owner Grant (FHOG), provides financial assistance towards the purchase of a new home, depending on state or territory requirements.
- Existing property equity: Buyers who already own a property may be able to use available equity as a funding source for another purchase instead of relying solely on cash savings. Not sure how much equity you can access? Use our Home Loan Equity Calculator to estimate your available equity before exploring your borrowing options.
- Home loan low deposit options: Some lenders offer home loan low deposit products that allow eligible borrowers to purchase with a smaller home loan deposit, subject to lending criteria and additional costs.
- Refinancing or loan top-ups: Homeowners who have built equity can refinance, which means replacing their existing home loan with a new one, or can access a loan top-up, meaning increasing their current borrowing amount to fund property purchases, renovations, or other financial goals.
- Redraw facilities: A home loan redraw facility allows borrowers to access extra repayments they have previously made on an eligible home loan, providing additional flexibility when funds are needed.
- Offset accounts: An offset mortgage account links a savings account to a home loan and reduces interest charges, and also allows borrowers to retain access to their savings.
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Should you save a deposit or use a guarantor home loan?
There is no one-size-fits-all answer. The right pathway depends entirely on your current savings, your household income, and how quickly you want to move into your new home.
A traditional home loan deposit may be your best option if:
- You prefer total independence: You want complete control over your mortgage without involving family members or linking your home to another person's property.
- You want a smaller loan balance: Contributing a larger upfront cash amount means you borrow less, which generally reduces your total interest costs over the life of the loan.
- You qualify for government assistance: You are eligible for initiatives like the First Home Guarantee, which allows you to purchase with a small deposit without paying extra insurance premiums.
A guarantor home loan arrangement may be your best option if:
- You want to buy immediately: You have a stable income to comfortably manage the monthly repayments, but want to bypass the years required to save a massive cash deposit.
- You want to maximise your borrowing power: You need to borrow up to 100% of the property purchase price, plus extra purchasing costs like stamp duty and legal fees.
- Family support is available: You have an immediate family member who owns property with usable equity, understands the legal commitments involved, and is willing to provide backup security.
Note: Every lender has strict and distinct criteria for both deposit structures and guarantor arrangements. Before making a commitment, both buyers and guarantors should obtain independent legal and professional guidance to review the specific conditions and long-term responsibilities.
Guarantor vs deposit home loan FAQs
1. Can a guarantor limit their liability, or are they responsible for the whole loan?
Yes, guarantors can limit their liability with a limited guarantee. Instead of securing the entire mortgage, they only cover a capped amount, typically the gap between your deposit and the standard 20% needed to avoid Lenders Mortgage Insurance (LMI).
For a $600,000 home, a 20% deposit is $120,000. If you've saved $30,000, your guarantor can cover the $90,000 shortfall. They are only liable for that capped $90,000, not the full mortgage. Once you build enough equity, they can be released from the guarantee entirely.
2. Does acting as a guarantor impact that person's ability to borrow or sell?
Yes, it can impact their financial flexibility. Because a portion of the guarantor's property equity is legally pledged as backup security for your mortgage, that specific amount is tied up. If your parents decide they want to sell their home, downsize, refinance, or access their own equity to fund retirement down the track, they will generally need the lender's approval or will have to wait until you can legally release them from the loan.
3. Who exactly qualifies to be a guarantor for a first home buyer?
Lenders have strict policies around who can provide secondary security. Generally, it must be an immediate family member most commonly parents, step-parents, or legal guardians. While a handful of select lenders may consider adult siblings or grandparents under specific conditions, friends and extended relatives (like aunts, uncles, or cousins) do not qualify. Additionally, the guarantor must own property in Australia with sufficient equity and have a clean credit history.
4. If I use a guarantor, do I still qualify for first-home buyer stamp duty concessions?
Yes, absolutely. Using a guarantor does not impact your eligibility for government grants or stamp duty exemptions. As the borrower, you are the sole owner listed on the property title and the contract of sale. The guarantor is simply providing a structural guarantee to the lender to back your loan application; they do not hold any legal ownership rights or names on your property title, meaning your first-home buyer benefits remain completely intact.
5. Can parents act as guarantors if they are retired or semi-retired?
Yes, but it depends heavily on the specific lender's criteria. Because a guarantor must demonstrate they can technically handle the financial commitment if a borrower defaults, some banks are hesitant if the parents no longer have active employment income. However, if your parents have substantial unencumbered equity (such as a fully paid-off home) or verifiable investment income, certain lenders on our panel are highly flexible and will still approve the arrangement.
6. What happens if the property value drops after I buy with a guarantor?
If the property market dips, your day-to-day mortgage repayments remain exactly the same. However, a drop in property value will increase your Loan-to-Value Ratio (LVR). Practically speaking, this means it will take longer for you to build up the necessary 20% equity required to remove the guarantee. The guarantor's property will remain tied to your loan for a longer period than originally anticipated until the market recovers or you aggressively pay down the loan balance.
Final thoughts on guarantor home loan vs saving a deposit
Choosing how you enter the property market is just as important as choosing the property itself. The right approach can reduce upfront costs, improve your borrowing position, and make your home ownership journey smoother from the beginning. Before making a decision, it's worth understanding how each option aligns with your financial circumstances and future goals.
At ZedPlus, we help you compare your options, choose the home loan solution that best suits your needs, and support you throughout the application process. Whether you are ready to buy now or planning ahead, we are here to help you make an informed decision.
Book a call with our lending experts today and take the next step towards owning your first home.
Disclaimer
The information provided in this blog is for general informational purposes only and does not constitute financial, legal, tax, or credit advice. Lending policies, eligibility criteria, and government schemes may change over time. Before making any financial decisions, consider seeking personalised advice from a qualified mortgage broker or financial adviser based on your individual circumstances.
