Family guarantee home loans: how a guarantor helps you buy, and how they get out

What is a family guarantee home loan?

A family guarantee home loan is a home loan where a family member, usually a parent, uses the equity in their own home as extra security for your loan. Equity is the part of their home they own outright, its value less what they still owe on it. The extra security lets you buy with a smaller deposit, and the lender often doesn't charge LMI, the insurance a lender takes out when you borrow more than 80% of the price, and that you pay for.

The guarantor doesn't give you money and doesn't make your repayments. They promise to pay a set amount if you can't, and a mortgage over their property secures that promise. MoneySmart, the government's money guide, puts their side in one line: "Being a guarantor means you may have to repay someone else's loan." [1]

You'll also see it called a guarantor home loan, a family guarantor home loan or a security guarantee. Lenders give it their own names, such as Family Security Support at CommBank [3] and Family Pledge at St.George [5].

How does a guarantor home loan work?

A guarantor home loan works by adding a second property to the lender's security. You bring whatever deposit you have. The guarantor offers a set part of their equity, secured by a mortgage over their property for that amount only. The lender looks at both properties together, and with the extra security your loan can sit at a level where LMI isn't needed, on the lender's own criteria. You make every repayment, and the guarantor is only called on if you can't pay and selling your home doesn't clear the debt.

Some lenders split the loan in two. Bankwest's guide describes two separate loans, a larger one secured on the home you buy alone, and a smaller one secured on both your home and the guarantor's equity. The guarantee comes off when that second, smaller loan is paid off [8].

What this means for you: the guarantor isn't backing your whole loan, only the slice that sits above what your own home can carry. Shrink that slice and you shrink their risk. That's why the size of the guarantee, and the way it ends, matter more than anything else on this page.

Limited or unlimited guarantee: what's the difference?

A limited guarantee caps what the guarantor can owe, and an unlimited guarantee doesn't. It's the first thing to check in the guarantee deed, the legal document the guarantor signs.

Banks that have signed up to the Banking Code of Practice must limit a guarantor's liability, and must take reasonable steps to meet the guarantor without the borrower there, in most cases [2]. Not every lender has signed up, so read the deed itself and confirm the cap before anyone signs.

The lenders' own guides add detail. St.George limits its Family Pledge to a nominated amount, not the whole loan [5], and ANZ describes its guarantee as limited [6]. At CommBank, a guarantor can ask in writing to limit their liability, and CommBank may refuse in three cases. The limit is less than what the borrower owes, CommBank has to make further advances, or it couldn't secure the present value of the security, such as a house still being built [3]. NAB's guide says the cap doesn't move when the borrower later borrows more, unless the guarantor agrees in writing [4].

What this means for you: a cap is only a cap if it's written in the deed. And if the loan is ever topped up, the guarantor's written agreement is the point where they can say no.

How much does the guarantor have to put up?

The guarantor usually puts up enough to cover the gap between your deposit and 20% of the price, so the loan resting on your own home alone comes down to 80%. Each lender sets its own level, so treat these as illustrations, not a lender's offer. Purchase costs such as stamp duty are left out to keep it simple.

Take the $700,000 home. You owe the full $665,000 and make every repayment. The part resting on your home alone is $560,000, which is 80% of the price. The most your parent can be asked for is $105,000, plus the interest and costs the deed sets out.

What this means for you: every dollar of deposit you add takes a dollar off the guarantee. Saving another $20,000 on the $700,000 home cuts your parent's promise from $105,000 to $85,000.

How much LMI does a family guarantee save?

A family guarantee can save the whole LMI premium, and with a 5% deposit that's a large sum. Here's what LMI would cost on a 95% loan for a first home buyer, from one insurer's published rate card [10].

These are illustrations from one rate card, not quotes. What you'd pay varies with the insurer, the lender and the loan.

What this means for you: on the $700,000 home, the guarantee is worth about $30,000 to you on the day you buy, and your parent carries a $105,000 promise to make it happen. Both numbers belong in the conversation with the person you're asking.

What happens if the borrower can't pay?

If the borrower can't pay, the lender turns to the borrower's own property first. The guarantor is called on only if you can't pay and selling your home doesn't clear the debt. Then the lender can ask the guarantor for the amount they guaranteed, plus interest and costs, and can enforce against their property if they don't pay it [1].

So, can a guarantor lose their house? Yes, if the guarantee is secured on their home and they can't pay the guaranteed amount. That's why the cap matters so much. On a limited guarantee it's the most they can lose, plus interest and costs.

A guarantor has options along the way. Suncorp's own help pages say a guarantor can lodge a financial difficulty request [9]. And CommBank's guide sets out that a guarantor can end the guarantee by paying out either the borrower's debt or their own maximum [3].

Does the guarantee have to be secured on a home?

The guarantee doesn't have to be secured on a home at every lender. Most guarantees are secured by a mortgage over the guarantor's home, but some lenders take cash. Westpac's page accepts savings or a term deposit as well as equity, and limits how much of the guarantee a term deposit can cover [7]. NAB's guide says the security can be "a mortgage on your home or a term deposit" [4].

Westpac's page also caps a guarantee against what the guarantor puts up, so a single guarantee can only be a set part of the guarantor's security [7]. Ask Westpac for the current limit. No other lender we read publishes a limit like it.

What this means for you: a parent who'd rather not put their home behind your loan may be able to offer cash instead, at a lender that takes it. The trade-off is that the money stays tied to your loan until the guarantee is released.

Does a guarantor need independent legal advice?

A guarantor needs independent legal advice at some lenders, and it's wise at all of them. Westpac and St.George require it [5][7]. ANZ and CommBank recommend it rather than require it [3][6].

ANZ also gives a guarantor a 3-day consideration period, which can be waived where they've taken independent legal advice [6]. Banks that have signed the Banking Code of Practice must take reasonable steps to meet the guarantor without the borrower there, in most cases [2].

Independent means the guarantor's own lawyer, not the borrower's. Whether advice is required changes how long a deal takes, so build it into the timeline from the start.

Does being a guarantor affect your own borrowing or credit?

Being a guarantor can affect both your borrowing and your credit. Lenders count the guarantee against you when you apply for credit yourself, so refinancing, a new loan or an investment purchase can get harder while it stands. A default on the loan you guaranteed can be recorded on your credit file [1].

It also ties up your home. If you want to sell, downsize or refinance while your home is still security for the guarantee, the lender holding it has to be part of that plan.

Can a retired parent or a pensioner be a guarantor?

A retired parent or a pensioner can be a guarantor at some lenders, but lenders differ. Some accept one with extra advice; others decline. Of the lenders we read, Westpac states an age rule only at the young end, a minimum age [7], and ANZ's page publishes no income or age test for a guarantor [6].

The question a lender asks is whether the guarantor could pay the guaranteed amount if they had to. On a pension that's a harder test to pass, so ask the lender before you plan around it.

How much can you borrow with a guarantor?

With a guarantor you can borrow up to the full purchase price at some lenders. ANZ's own page describes lending up to 100% of the price with a guarantee [6]. Other lenders set their own ceiling. Of the six lenders whose guarantor material Money Brain read, only Westpac publishes a limit on the guaranteed part (part 10), and the others leave it to their own assessment.

A guarantee helps with the deposit. It doesn't help you afford the repayments. The lender still works out what you can borrow from your income, your debts and your living costs, and checks you could still repay if rates were at least 3 percentage points higher, the buffer APRA expects banks to use [12]. A bigger guarantee doesn't raise what your income can support. See how much can I borrow.

Borrowing 100% also means owing 100%. If values fall, you can owe more than your home is worth, and the guarantee stays on longer.

How to remove a guarantor from your home loan

Removing a guarantor from your home loan doesn't happen on its own: you apply, and the lender decides. First, the loan has to shrink against the property's value, through your repayments, a rise in value, or both, until it meets the lender's test (part 15). Second, your repayment record has to be clean. Then you apply, and the lender usually orders a new valuation and reviews the loan before it lets the guarantee go.

How long does a guarantor stay on a home loan?

A guarantor stays on a home loan until it meets the lender's release test, and there's no set date. How long that takes depends on how fast you pay down and what values do. A flat market makes it longer.

You control two levers. Paying extra off the loan shrinks it faster, and at Bankwest, paying off the smaller guaranteed loan is the release itself, though early repayment fees may apply on that loan [8]. A new valuation can show a rise in value.

What this means for you: plan the exit before anyone signs. If your guarantor will want to sell, downsize or borrow for themselves in a few years, that date belongs in the plan from the first day.

Can you use a guarantor to buy an investment property?

You can use a guarantor to buy an investment property at some lenders, with limits. St.George's Family Pledge is open for every owner-occupier purchase, but for an investment only to a first home buyer buying an investment property [5]. So a first-time buyer who wants to rent where they live and buy where the numbers work can use it; an investor who already owns a home can't.

We didn't find that restriction in the other lenders' material we read, which isn't the same as saying there's none. If you already own a home, your own equity may do the guarantor's job. See using equity to buy an investment.

Is a family guarantee the same as the Family Home Guarantee?

A family guarantee isn't the same as the Family Home Guarantee. A family guarantee is a private arrangement, where your family's equity backs your loan. The Family Home Guarantee was a government scheme for single parents, and it no longer runs as a separate scheme. Single parents and legal guardians are now a group inside the Australian Government 5% Deposit Scheme, buying from a 2% deposit and applying on their own [11].

With the government scheme, Housing Australia guarantees the lender in place of LMI, and no family member signs anything [11]. See the First Home Guarantee and home loans for single parents.

Guarantor, co-borrower or gifted deposit?

A guarantor, a co-borrower and a gifted deposit are three different ways family can help, and they ask very different things. A guarantor backs a set amount with security and is usually not on the title or the loan. A co-borrower owes the whole loan with you from the first day. A gift is cash, with no ongoing tie.

None is always better. It depends on the family's equity and income, the relationship, and the lender. A gift asks for your family's savings and nothing of their home; a guarantee asks nothing of their savings and something of their home. More on gifts and other small-deposit routes in no deposit home loans.

Family guarantee or the 5% Deposit Scheme?

If the home is under your area's price cap and you qualify, the 5% Deposit Scheme does the same job with nobody's home on the line. Housing Australia guarantees the lender in place of LMI, from a 5% deposit [11]. A family guarantee makes more sense when the price is over the cap, you've owned property in the last 10 years, or you want to rent the home out later, which the scheme doesn't allow while it's in place [11].

The two end differently, too. The scheme's guarantee stops on its own once the loan reaches 80% of the value on your scheduled repayments [11]; a family guarantee has to be released by the lender (part 15). Help to Buy, from a 2% deposit, is another route, but it can't be used together with the 5% Deposit Scheme [11][13].

The full side-by-side is on 5% Deposit Scheme or a family guarantor, and the price caps for every state are on the First Home Guarantee.

What does a broker cost you?

How a broker is paid, and the rule Money Brain holds against it, is set out in full on its own page: what a mortgage broker costs.

Your first move

You've read how a family guarantee works. Now there's one question left: which lender takes your guarantor, with the smallest guarantee and the clearest way out? That depends on who's offering, what their home is worth and owes, and the price you want, and it's what Money Brain works out before anything goes to a lender.

When you're ready, the closing section below is the simplest way to start.