I have watched more family guarantees go through in the past six months than in the two years before it, and the reason is simple: with a 5 per cent deposit costing a first home buyer $15,000-plus in lenders mortgage insurance, parents with equity in their own home are stepping in to kill that cost. Done properly it is the single most powerful thing the Bank of Mum and Dad can do. Done carelessly, in a market where Sydney fell 3.2 per cent over the June quarter and Melbourne 2.6 (Cotality's June Home Value Index, published 1 July), it pledges a parent's home against a loan on a property that is losing value while they sleep. Both of those things are true at once, and any broker who only tells you the first half is not showing you the whole file. Here is how the security guarantee actually works, what it saves, and exactly what the guarantor is signing up for.
What a security guarantee actually is
The version worth doing is a limited security guarantee, sometimes called a family pledge. The parent does not guarantee your whole loan and does not put in cash. They pledge a capped slice of the equity in their own home as additional security, and the lender takes a second mortgage over the parent's property for that capped amount only. Your loan and the parental slice, added together, are measured against the combined value of both properties. If that combined position clears 80 per cent, the loan does not attract LMI even though your own deposit is well under 20 per cent. CBA (through its Family Guarantee), Westpac, St George, NAB and most of the majors write these; the structure is standard, the cap is the part that protects everyone. You want the guarantee limited to a specific dollar figure written into the mortgage, not an open guarantee over the full loan.
A worked example on a $600,000 purchase
Take a first home buyer buying at $600,000 with $30,000 saved, a genuine 5 per cent deposit. Without a guarantee they borrow $570,000, which is a 95 per cent LVR loan, and the LMI premium on that runs to roughly $18,000 to $20,000 depending on lender, usually capitalised onto the loan so they are actually paying interest on it for 30 years. Now add a limited guarantee. To take the lender's combined security position under 80 per cent, the parent pledges $115,000, which is about 19 per cent of the purchase price, as additional security. The lender now measures the $570,000 loan against $600,000 of your property plus $115,000 of pledged parental security, a combined $715,000 of security. That puts the effective LVR at about 79.7 per cent, under the 80 threshold, and the LMI disappears entirely. The buyer keeps their $30,000 in, borrows the same $570,000, and saves the full LMI premium. The parent's exposure is capped at $115,000: that is the most the lender can ever pursue against their home under the guarantee, not the whole $570,000.
Run the LMI number through the calculator for your own price point before you assume it applies. On this example the saving is roughly $18,000 of premium, plus the compounding interest on it you never pay. That is real money, and it is the entire case for doing this.
Why a falling market changes the maths
Here is the timely twist the LMI saving hides. The goal is always to release the guarantee, to get the parent's home off the second mortgage as fast as possible. That happens when your own loan falls below 80 per cent of your property's value on its own, without the parental slice propping it up. Two things drive you there: paying down the principal, and your property gaining value. In a rising market both push the same way and the guarantee is often gone in three to four years. In the market we are actually in, one of those two engines has stalled. Sydney is in a confirmed, accelerating correction after a 3.2 per cent fall over the June quarter, and Melbourne's annual growth is now negative at about minus 0.9 per cent; the automated valuation models every lender runs are ingesting the June index and coming back lower. If your property is flat or falling, the only thing releasing the guarantee is your own principal paydown, and that takes far longer on its own. A guarantee everyone assumed would last three years can sit live for six or seven. The parent's house stays pledged the whole time, and they cannot cleanly sell, downsize or restructure their own mortgage while it is.
Be honest about the trade-offs
This is a genuinely good tool with real teeth. Three things the guarantor needs to walk in knowing, in plain terms.
- The guarantor is legally liable for the guaranteed portion. If the buyer defaults and the lender cannot recover the shortfall from selling the buyer's property, the lender can pursue the guarantor's home for the capped amount. On the example above that is up to $115,000 against the parent's house. This is not theoretical; it is the whole reason the second mortgage exists.
- Negative equity can trap the guarantee for years. If the buyer's property falls below what they owe, the guarantee cannot be released at all until values recover or the loan is paid down far enough. In Sydney and Melbourne right now that is not a tail risk, it is the base case for a 95 per cent buyer in the first couple of years.
- The parent's own borrowing is constrained while the guarantee is live. A second mortgage over their home reduces the equity they can access for their own purposes, complicates any refinance, and can hold up a downsize. If Mum and Dad are within a few years of selling and moving, a guarantee can get in the way at exactly the wrong moment.
Every lender writing these requires the guarantor to get independent legal advice before signing, and a solicitor to certify they understood it. That is not a box-tick. It is the one moment a parent has someone in the room whose only job is to explain what their signature does. Do not treat it as a formality, and do not use the buyer's own conveyancer for it.
Who it suits, and who should not do it
It suits a buyer with stable income and a real capacity to make extra repayments, whose only barrier is the deposit and the LMI, and whose parents own their home with comfortable equity and no plans to sell or borrow against it for the next five-plus years. That family gets an $18,000 saving and a clear path to release. It does not suit a buyer whose serviceability is already marginal, because the guarantee solves the deposit problem, not the repayment problem, and lenders still test you at roughly 9.2 to 9.5 per cent (the variable rate plus the 3 per cent APRA buffer, which is unchanged while its consultation runs to 18 July). It does not suit parents who are asset-rich but cash-poor and close to retirement, and it does not suit any family where the buyer is buying at the top of their range in a falling capital, because that is the exact profile that lands in negative equity and traps everyone.
What you should actually do
Insist on a limited guarantee capped at a specific dollar figure, sized to just clear 80 per cent combined LVR and no more, so the parent's exposure is the smallest number that does the job (about $115,000 on the $600,000 example above, not a dollar more). Before anyone signs, model the release honestly: assume zero capital growth for two to three years, given where Sydney and Melbourne are printing, and work out how much principal you have to repay to get your own loan under 80 per cent LVR on its own. That is your real release timeline, and it is the number the parents deserve to see, not the optimistic one. Get the guarantor genuinely independent legal advice from their own solicitor, not the buyer's. Then attack the principal from day one: every extra dollar into the loan is a dollar that shortens the guarantee and gets your parents' house back sooner. Run your price point through the LMI calculator so you know exactly what you are saving, and the borrowing power calculator so you know the guarantee is fixing the deposit and not papering over a serviceability gap it cannot solve.
Disclosure: Your Finance Guide partners with Australian Lending and Investment Centre (ALG) ACL 505575 for broker matching, and ALG receives lender commissions on settled loans. A guarantee that gets released fast, or a family that decides after the legal advice not to proceed, is frequently the right outcome and pays a broker no more than any other. Your parents' home is not a settlement number, and structuring the cap and the release to protect it should come before anyone's commission. LMI premiums, lender guarantee policies and property values cited here move; check current figures with the linked calculators and sources before you act.