Guarantor Home Loans — Buy with Family Support

How Family Guarantee Home Loans Work

A guarantor home loan — often called a family guarantee or family pledge — uses equity in a family member's property as additional security for your home loan. The guarantor does not lend you money, co-sign the loan, or appear on the title of your new property. Instead, their property is offered as a limited guarantee that tops up your deposit to an effective 20% or more, allowing you to avoid LMI entirely.

The loan is typically structured as two separate portions. The first is a standard home loan covering up to 80% of your property value, which carries the best available interest rate and is secured solely against your new property. The second is the guaranteed portion, covering the remaining balance (the gap between your deposit and 20%). This portion is secured by both your property and the guarantor's property.

This structure means the guarantor's exposure is limited to the guaranteed amount only — not your entire loan. If your property is worth $700,000 and you have a $35,000 deposit (5%), the guaranteed portion is approximately $105,000 (the difference between your 5% deposit and the 20% needed to avoid LMI). The guarantor is only at risk for this $105,000, not the full $665,000 loan.

Benefits of a Guarantor Loan

The advantages of a guarantor arrangement extend well beyond simply avoiding the deposit barrier. Understanding the full range of benefits helps you appreciate why this structure has become so popular among first home buyers and their families.

Massive LMI savings. LMI on a $700,000 property with a 5% deposit can cost $25,000 to $35,000. With a guarantor, this cost is eliminated entirely because the guarantee effectively creates a 20%+ security position. This saving alone can be the equivalent of several years of additional saving.

Enter the market sooner. In a rising property market, the time spent saving for a 20% deposit can be counterproductive. If property prices increase by 5% per year and you need three more years to save a full deposit, you could find yourself chasing a moving target. A guarantor loan lets you enter the market now and benefit from price growth rather than being disadvantaged by it.

Standard interest rates. Unlike low-deposit loans that attract higher rates or LMI premiums, a guarantor loan typically qualifies for the same competitive interest rates as a borrower with a 20% deposit. There is no rate penalty for using a guarantor.

Tax-free family assistance. Unlike a cash gift from parents (which may have implications for centrelink and tax), providing a guarantee does not involve any transfer of money. The parents retain full ownership and use of their property. No stamp duty, capital gains, or gift complications arise.

Risks for the Guarantor and How to Manage Them

Being a guarantor is a serious financial commitment, and it is essential that both the borrower and guarantor fully understand the risks involved. While the risk is limited and the arrangement is temporary, the potential consequences of default must be considered.

If the borrower defaults on the loan and the lender is unable to recover the full amount from selling the borrower's property, the lender can call on the guarantee. In the worst case, this could mean the lender places a caveat on or seeks to sell the guarantor's property to recover the guaranteed amount. However, this scenario is extremely rare and involves multiple steps before reaching that point.

To manage this risk, the guarantee should be structured as a limited guarantee (which it is in standard family guarantee products) capping the guarantor's exposure to a specific dollar amount. Both parties must receive independent legal advice before signing, ensuring the guarantor fully understands their obligations. The borrower should maintain adequate income and expense buffers, and both parties should have appropriate insurance in place.

The Guarantor Exit Strategy

A guarantor arrangement is designed to be temporary. The goal is to release the guarantor as soon as the borrower builds sufficient equity to stand on their own. This typically happens when the loan-to-value ratio reaches 80% or below — the same threshold at which LMI is no longer required.

Equity builds through three mechanisms: regular loan repayments that reduce the principal balance, extra repayments that accelerate principal reduction, and property value appreciation. In practice, most borrowers can release their guarantor within 2-5 years, depending on the initial LVR and the rate of property value growth.

For example, if you purchase a $700,000 property with a $665,000 loan (95% LVR), you need to reduce the loan to $560,000 (80% LVR) to release the guarantor. Through regular repayments over 3 years, you might reduce the balance by approximately $20,000 to $645,000. If the property has also appreciated by 5% to $735,000, your LVR is now $645,000 / $735,000 = 87.8%. Adding some extra repayments or waiting for a bit more growth would get you to the 80% threshold.

We proactively track your equity position and reach out to initiate the guarantor release process as soon as you qualify. The release involves a formal property valuation to confirm the current value and a partial discharge of the guarantor's mortgage from the guaranteed portion of your loan.