How does a family guarantee work?
Learn how a family guarantee home loan works, who can act as a guarantor, and what it means for your deposit. A simple guide for Australians buying a home with help from family.
A family guarantee home loan lets a close relative, usually a parent, use equity in their property as extra security for your loan. This can help you buy a home sooner, potentially avoid Lenders Mortgage Insurance (LMI), and buy a property with a smaller deposit.
Family guarantees are one way some first home buyers bridge the deposit gap without waiting years to save a 20% deposit.
What is a family guarantee home loan?
A family guarantee home loan is a mortgage where a guarantor, typically a parent, pledges equity in their own property as additional security. The guarantor does not hand over cash or go on the property title.
Instead, the lender uses the guarantor’s property to reduce the loan-to-value ratio (LVR). This may reduce the lender’s risk and, depending on the lender’s criteria, may allow the borrower to buy with a smaller deposit.
Who can be a guarantor?
Some lenders may also require the guarantor to be an immediate family member. Eligible guarantors typically include:
- Parents - a common type of guarantor for first home buyers
- Siblings - accepted by some lenders
- Grandparents - accepted by some lenders, though age limits may apply
- Adult children (aged 18+) - accepted by some lenders
Guarantors generally need to be Australian citizens or permanent residents, own property with sufficient usable equity, and have a stable financial position. Some lenders may require the guarantor to seek independent legal advice before signing.
How does a family guarantee work?
A family guarantee works by linking the guarantor’s property equity to the borrower’s home loan as additional security. The guarantee typically covers only the portion above 80% LVR, not the full loan.
This means the lender treats the combined security (your property plus the guaranteed equity) as though you have a larger deposit. In some cases, this may reduce the effective LVR to 80% or below, which can reduce or remove the need for Lenders Mortgage Insurance (LMI), depending on the lender’s criteria.
How can a family guarantee help you buy a home?
A family guarantee removes one of the biggest barriers to home ownership: the deposit. Here are the potential benefits:
- Buy sooner with a smaller deposit - some lenders may allow borrowers to purchase with a smaller deposit instead of the standard 20%, which could take years to save
- Potentially avoid Lenders Mortgage Insurance (LMI) - A guarantee that brings your effective LVR to 80% may reduce or remove this cost, depending on the lender and loan structure.
- Access a larger loan amount - some lenders may allow guarantor borrowers to purchase with a smaller deposit, and in limited cases borrow up to the property value, depending on the lender’s criteria and loan structure
Please note that Unloan does not participate in government grants or assistance schemes.
What are the risks of a family guarantee?
A family guarantee creates a legal obligation. If the borrower defaults, the guarantor may become liable for the guaranteed portion of the debt. Both parties need to understand the risks before proceeding.
Potential risks for the guarantor
- Financial liability - if the borrower cannot repay and the property sells for less than the outstanding loan, the guarantor may need to cover the shortfall up to the guaranteed amount
- Reduced borrowing capacity - the guarantee may affect the guarantor’s borrowing capacity
- Property at risk - in a worst-case scenario, the guarantor’s property could be affected if the guaranteed amount cannot be repaid
Potential risks for the borrower
- Higher total debt - borrowing 95–100% of the property value means more interest over the life of the loan compared to having a 20% deposit
- Relationship strain - financial arrangements between family members can create tension, especially if repayment difficulties arise
- Negative equity risk - if property values fall, you could owe more than the property is worth, making it harder to release the guarantee
What is a limited vs unlimited guarantee?
Some lenders offer limited guarantees as the standard. A limited guarantee caps the guarantor’s liability at a fixed dollar amount, typically the portion needed to bring the LVR down to 80%.
An unlimited guarantee, by contrast, may make the guarantor liable for the entire loan balance plus interest and fees. These are far less common for residential home loans and may involve greater risk for the guarantor.
If you are considering a family guarantee, consider asking your lender to confirm whether the guarantee is limited. A limited guarantee gives the guarantor more certainty about their maximum exposure.
Can a family guarantee be removed?
In some cases, a family guarantee may be able to be removed if the borrower’s LVR reduces. This is sometimes called ‘releasing the guarantee’. The LVR can drop through a combination of:
- Loan repayments - as you pay down the principal, your loan balance decreases and your LVR falls
- Property value growth - if your property increases in value, your LVR improves even without extra repayments
- Extra repayments - making additional repayments accelerates the process
To release the guarantee, you or your guarantor applies to the lender. The lender may reassess your loan, order a property valuation and confirm whether the LVR is at or below 80%, depending on the lender’s process and criteria.
What do lenders assess for a family guarantee home loan?
Lenders assess both the borrower and the guarantor separately. Here is what each party typically need to demonstrate:
Borrower requirements
- Stable income - payslips, tax returns, or business financials showing you can service the full loan repayments on your own
- Acceptable credit history - the lender will run a credit check to assess your repayment track record
- Manageable debts and expenses - your debt-to-income ratio must fall within the lender’s serviceability threshold
- Some genuine savings - most lenders require at least a 5% deposit to show financial discipline, even with a guarantor
Guarantor requirements
- Sufficient usable equity - the guarantor’s property must have enough equity above any existing mortgage to cover the guaranteed amount (some lenders may allow up to 80% of the guarantor’s property value)
- Good credit history - the guarantor’s credit file will also be assessed
- Financial capacity - the guarantor must demonstrate they can meet their own financial commitments while supporting the guarantee
- Independent legal advice - some lenders may require the guarantor to obtain legal advice before signing the guarantee
What are the alternatives to a family guarantee?
If a family guarantee is not an option, you still have pathways to home ownership:
- Save a 20% deposit – this may help you avoid LMI and gives you the widest choice of lenders and rates
- Government Home Guarantee Scheme - some eligible first home buyers may be able to purchase a property with a lower deposit without paying LMI, subject to scheme eligibility criteria
- Low-deposit home loan with LMI - some borrowers choose to pay LMI upfront or capitalise it into the loan to enter the market sooner.
- Family gift deposit - a family member gives you money toward your deposit instead of guaranteeing the loan. The lender will ask whether the gift needs to be repaid
- Co-purchasing with a partner or family member - pooling income and savings with another person can increase your borrowing power and deposit size
Is a family guarantee right for you?
A family guarantee may be one option to help with home ownership if you have stable income, can comfortably service the loan, and have a willing family member with sufficient equity.
Before proceeding, both the borrower and guarantor may wish to:
- Discuss the arrangement openly, including what happens if repayments become difficult
- Consider discussing a plan to release the guarantee as quickly as possible
- Seek independent legal and financial advice – some lenders require this for the guarantor
Before exploring a family guarantee, find out how much you can borrow on your own. Unloan’s borrowing power calculator can provide an estimate based on your income, expenses, and existing debts.
If the gap between your borrowing power and your target property price is small, a family guarantee may help you bridge it. If the gap is large, you may need to adjust your property budget or save a larger deposit.
Unloan is a division of Commonwealth Bank of Australia.
Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. If you currently have an Unloan home loan with an active Lender’s Mortgage Insurance (LMI) policy the maximum amount you can borrow across all Unloan loans is $3,000,000. Please note Unloan currently doesn’t offer loans with an LMI premium. In some cases, depending on the property’s location or type, we may only be able to lend you up to 70% of the property’s value.
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The loyalty discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Unloan is a division of Commonwealth Bank of Australia, and Commonwealth Bank does not provide tax (financial) advice under the Tax Agent Services Act 2009 (Cth). You should consider seeking independent tax advice from a registered tax agent, accountant or adviser before you make any decisions based on this information.
Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. If you currently have an Unloan home loan with an active Lender’s Mortgage Insurance (LMI) policy the maximum amount you can borrow across all Unloan loans is $3,000,000. Please note Unloan currently doesn’t offer loans with an LMI premium. In some cases, depending on the property’s location or type, we may only be able to lend you up to 70% of the property’s value.
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The loyalty discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Applications are subject to credit approval, satisfactory security and minimum deposit requirements. Full terms and conditions are found on our Unloan Terms and Conditions. Modified Terms and Conditions will be set out in our Notice of Variation Agreement, if you are approved. This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The loyalty discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
