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Guarantor Home Loans: Buying Sooner With Help From Family

7 min read · by Ugur, demir.loans

Guarantor loans have a reputation as a last resort for people who can't save. Often it's the opposite. Plenty of buyers could save the full deposit if they kept going for another few years, while paying rent and watching prices move. A family guarantee lets them buy now instead, using equity a parent already has, without the parent handing over any cash.

How a family guarantee works

Normally a lender wants a deposit of around 20% before it will lend without lenders mortgage insurance. With a family guarantee, a parent or close family member offers some of the equity in their own property as extra security for your loan. That equity covers the gap between the deposit you have and the deposit the lender wants. No money changes hands. Your guarantor's property simply sits behind part of your loan as additional security. Depending on the lender, that can let you buy with a small deposit, or in some cases none, and avoid lenders mortgage insurance entirely.

Why it can beat saving for longer

Saving a 20% deposit on a Sydney property can take years, and the target keeps moving while you save. Rent is going out every month in the meantime. A family guarantee doesn't make the property cheaper, but it can bring the purchase forward and avoid a lenders mortgage insurance premium, which can run to tens of thousands of dollars on a small deposit. The trade-off is a larger loan at the start, so the repayments have to work on your income alone. That part doesn't change: you still need to qualify for the full loan in your own right.

What the guarantor is signing up for

This is the part families should understand clearly before anyone signs. Most family guarantees are limited, meaning the guarantor is only liable up to a set amount, usually the portion of the loan their equity is covering. If the borrower can't repay and the property is sold for less than the debt, the lender can call on the guarantor for that amount. If the guarantor can't pay it, their own property is at risk. Lenders generally require guarantors to get independent legal advice before signing, and that's a protection worth taking seriously, not a box to tick.

Who can be a guarantor

Most lenders accept parents. Some also accept other immediate family, such as grandparents, siblings or a spouse, and policies vary on who qualifies. The guarantor usually needs enough equity in a property in Australia to cover the guaranteed amount, and lenders will look at their age, income and circumstances. A guarantor still paying off their own home can sometimes qualify, as long as there's enough equity left over after their existing loan.

Getting the guarantee released

A family guarantee isn't meant to be permanent. Once your loan comes down to around 80% of your property's value, through repayments, value growth or both, you can usually apply to have the guarantee removed. The lender will typically need a fresh valuation and to confirm you can carry the loan on your own. When it's released, your guarantor's property is no longer tied to your loan. Plenty of buyers aim to get there within a few years, and planning for it from day one makes it more likely.

Questions to settle as a family first

Is the guarantor comfortable with the worst case, including the guaranteed amount being called on?
How much does the guarantee need to cover, and can it be kept to the smallest amount that works?
Could the guarantee affect the guarantor's own plans, such as borrowing, downsizing or retiring?
Has the guarantor had independent legal advice, separate from the borrower?
What's the plan to get the guarantee released, and roughly when?
If there are siblings, has the family talked through how it treats each of them fairly?

Questions, answered

Does my guarantor have to make my repayments?

No. You make the repayments. The guarantor is only called on if you default and the sale of the property doesn't cover what's owed, and then usually only up to the limit of the guarantee.

Is a family guarantee the same as the government's First Home Guarantee?

No. The government scheme is a separate program for eligible first home buyers, with its own rules and price caps. A family guarantee uses a relative's property equity instead, and isn't limited to first home buyers. Sometimes one suits better than the other, and it's worth comparing both.

Can my parents be guarantors if they still have a mortgage?

Often, yes. What matters is whether there's enough equity in their property after their own loan to cover the guaranteed amount, and whether their lender's position allows it.

Does every lender offer family guarantees?

No. Not every lender offers them, and the rules on who can guarantee, how much can be guaranteed and how release works vary a lot. I compare the lenders on my panel that do offer them and match one to your family's situation.

Talk it through

General information only, so the next step is applying it to your numbers. Book a chat, email ugur@demir.loans or call 0495 000 228. Free, no obligation.

This article is general information only and doesn't take your objectives, financial situation or needs into account. Scheme rules, thresholds and fees change; check current figures before relying on them. No interest rates are quoted on this website.