Understanding Family Guarantees and How They Can Help You Buy Sooner
For many Australians, saving a 20% deposit while paying rent feels like running on a treadmill—you're working hard but not getting anywhere. Property prices keep rising, and that deposit goal keeps moving further away. This is where a family guarantee can be a game-changer, potentially helping you buy years earlier than you could on your own.
A guarantor loan allows a family member (usually parents) to use the equity in their property to help secure your home loan. It's not about giving you money—it's about providing additional security that reduces the lender's risk and can eliminate the need for Lenders Mortgage Insurance (LMI).
A guarantor loan is a home loan where a family member (the guarantor) offers their property as additional security for part of your loan. The guarantor doesn't give you cash or make your repayments—they simply allow the lender to place a limited charge over their property, which provides extra security for your loan.
With a limited guarantee, your loan is typically split into two parts. The main portion (usually 80% of the property value) is secured against your new property alone. The remaining portion (the guarantee portion) is secured against both your property and your guarantor's property.
Your deposit: $30,000 (5%)
Total loan required: $570,000
Main loan (80% LVR): $480,000 — secured against your property only
Guarantee portion: $90,000 — secured against both properties
Result: No LMI payable, saving approximately $15,000-$20,000
The guarantee isn't permanent. Once you've built enough equity in your property (typically when your loan-to-value ratio drops to 80% or below), you can apply to have the guarantee released. This can happen through:
Lenders have specific requirements for who can act as a guarantor. The criteria varies between lenders, but generally includes:
While guarantor loans offer significant benefits for home buyers, it's crucial that guarantors understand their obligations and potential risks. Being a guarantor is a serious financial commitment that shouldn't be entered into lightly.
If the borrower defaults on their loan repayments, the lender can pursue the guarantor for the guaranteed amount. In extreme cases, this could mean the guarantor needs to sell their property or refinance to cover the debt. This is why limited guarantees and proper structuring are so important.
We always recommend these protective measures:
If a guarantor loan isn't suitable for your situation, there are other options to consider:
First Home Guarantee (FHBG): Government scheme allowing 5% deposit with no LMI for eligible first home buyers
Gift funds: Family members can gift deposit funds instead of providing a guarantee
Low deposit loans: Some lenders offer loans with 5-10% deposit (LMI applies)
First Home Super Saver Scheme: Use super contributions to boost your deposit
Setting up a guarantor loan correctly is crucial for protecting both the borrower and the guarantor. Our team specialises in structuring guarantor loans to minimise risk while maximising benefits. We work with lenders who offer limited guarantees and ensure proper documentation is in place.
Let us help you understand if a guarantor loan is right for your situation and structure it properly to protect everyone involved.
Get in touch with our expert team today for a free consultation and personalized lending solution.
