By Chaice Paterson, CEO & Founder, Low Deposit Homes | Updated June 2026

For most Australian first home buyers in 2026, the 5% Deposit Scheme is a clearly better path than a guarantor home loan — no family member’s home is put at risk, no awkward family conversations, no risk of strained relationships if circumstances change. The 5% Deposit Scheme achieves the same financial outcome (buying with low deposit, no LMI) without exposing parents or family to potential loss of their property. There are specific situations where a guarantor loan might still make sense — typically buying established above the 5% Scheme cap, or with significant credit issues — but these are increasingly rare. Here’s the side-by-side comparison.

How does a guarantor home loan work?

A guarantor loan uses a family member’s existing property equity as additional security for your loan. The guarantor (usually parents) signs a guarantee for a specific portion of your loan — typically 20% of the property value, which is enough to bring the loan-to-value ratio (LVR) below 80% and avoid LMI.

Example: You’re buying a $900,000 home. You have 5% deposit ($45,000). The bank would normally charge LMI. With a guarantor providing 15% security ($135,000) against their own property’s equity, the bank treats the loan as 80% LVR and waives LMI.

The guarantor’s risk: if you default on your loan, the bank can call on the guarantor’s guarantee — meaning their property is at risk. In worst cases, the guarantor’s home can be forced into sale to cover your defaulted loan.

How does the 5% Deposit Scheme work?

The 5% Deposit Scheme is the Federal Government’s first home buyer guarantee program. The government acts as guarantor for the gap between your 5% deposit and the 20% LVR threshold — meaning the bank treats your loan as if you had a 20% deposit, even though you only have 5%.

No LMI charged. No family member at risk. You own 100% of the property. The government guarantee is silent — you don’t pay anything for it.

Eligibility: first home buyer (or no property in past 10 years), Australian citizen or PR, property under cap ($1M metro QLD, $950K metro VIC), no income cap (since October 2025).

What’s the side-by-side comparison?

For most first home buyers buying within the scheme cap, the 5% Deposit Scheme delivers identical financial benefit without family risk.

Why might a guarantor loan still make sense?

Three specific scenarios where guarantor loans remain relevant:

1. Buying above the 5% Scheme cap. If you’re buying a $1.2M established home in inner Brisbane (above the $1M scheme cap), the 5% Scheme isn’t available. A guarantor loan can achieve no-LMI lending at higher property prices.
2. Significant credit issues. Some buyers with credit issues can’t access mainstream first home buyer schemes. A guarantor loan may unlock lending that would otherwise be declined — though many lenders won’t accept guarantors for credit-impaired applicants either.
3. Self-employed with complex income. Lenders are sometimes more flexible with guarantor loans for self-employed applicants whose income profile doesn’t fit standard scheme criteria.

For most first home buyers — couples, single buyers, single parents buying within scheme caps — the 5% Deposit Scheme (or Family Home Guarantee for single parents) is a cleaner option.

What are the risks of a guarantor loan to the family?

The risks are real and worth understanding before asking parents to consider it:

1. Property at risk on default. If you default, the bank can call the guarantee. Worst case: the guarantor’s property is forced into sale.
2. Reduced guarantor borrowing capacity. While the guarantee is active, the guarantor cannot easily refinance, sell, or use that property’s equity for other purposes.
3. Strain on family relationships. Any future financial conflict (you can’t make a repayment, marketdrop, life event) creates pressure on the family relationship.
4. Tax and Centrelink implications. The guarantee may affect the guarantor’s pension eligibility and tax position.
5. Removal process. Removing a guarantee was historically a slow, paperwork-heavy process. In recent years most banks have made guarantee removal significantly easier — typically you can apply to release the guarantor once your loan-to-value ratio has dropped below 80% (through repayments, property growth, or a combination). That said, the process still requires lender approval and a valuation, and the timing depends on each bank’s policy.

Why does LDH recommend the 5% Scheme over guarantor loans?

Three reasons:

1. Family relationship integrity. Money and family are difficult enough without intertwining them in a 30-year mortgage commitment. The 5% Scheme keeps your home purchase clean and independent.
2. Future flexibility. When you eventually want to refinance, sell, or use equity for renovations — there’s no family approval needed. You own and control the property entirely.
3. Equal outcome. For 95% of first home buyers within scheme caps, the financial outcome is identical between the two paths. Why introduce family risk for no additional benefit?

“Every year I see clients trying to choose between a parent guarantee and the 5% Scheme. For most first home buyers who qualify for the Scheme, it’s the cleaner path — the government takes the guarantor role, and your parents’ home isn’t part of the conversation. Use the government’s guarantee, not your family’s.” — Chaice Paterson, founder of Low Deposit Homes

What if my parents WANT to help — what are the alternatives?

If family wants to help financially without the risk of a guarantee:

1. Gift deposit. Parents gift a portion of the deposit. Properly documented as a non-refundable gift. No ongoing obligation, no property at risk.
2. FHSSS contribution support. Parents help fund your voluntary super contributions over years — tax-efficient and contributes to your own genuine savings.

A combination is often optimal — a moderate parental gift toward deposit, combined with the 5% Deposit Scheme to avoid LMI, gives the best of both worlds.

Frequently Asked Questions

Q: Can I use BOTH the 5% Scheme AND a parent gift? Yes — these stack perfectly. Parent gift counts toward your deposit; the 5% Scheme eliminates LMI on the loan. No conflict.

Q: What if I default — does my parent lose their house immediately? Not immediately, but eventually possible. The bank would first pursue your default through standard channels (notices, mortgagee sale of your property). If shortfall remains, the bank can then call on the guarantee. The guarantor’s property would only be at risk if all other recovery options have been exhausted.

Q: Can the guarantee be released later? Yes. Most banks have made guarantee removal significantly easier in recent years. The typical trigger is your loan-to-value ratio dropping below 80% — which happens through some combination of repayments, capital growth, and additional voluntary repayments or offset deposits. You apply to your lender, they assess your standalone serviceability and order a fresh valuation, and if it stacks up they release the guarantor. The timing depends on the bank’s specific policy and your loan’s progress, but it’s a much more straightforward process than it used to be.

Q: My parents have offered to be guarantors — should I accept? First check: can you qualify under the 5% Deposit Scheme or FHG instead? If yes, take that path — the government’s guarantee achieves the same outcome without family risk. If no (above scheme cap, returning homeowner, etc.), then consider the guarantor option with full awareness of the family risk.

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Low Deposit Homes operates under Winning Homes Australia Pty Ltd (ACN 633 321 758). All calculations are indicative. Individual circumstances may vary. This is not financial advice.