How to Use a Family Guarantee Loan to Buy Property in Australia

Buying a home in Australia is a significant milestone, but saving for a large deposit can be challenging, especially with rising property prices. A family guarantee loan, also known as a guarantor home loan, offers a pathway to homeownership with a smaller deposit and without the cost of Lenders Mortgage Insurance (LMI). This guide explains how these loans work, who is eligible, and what both borrowers and guarantors need to consider.

![Family discussing home loan options]( Photo by Atlantic Ambience on Pexels )

What is a Family Guarantee Loan?

A family guarantee loan is a home loan where a family member, typically a parent, uses the equity in their own property as security for part of your loan. This allows you to borrow up to 100% of the purchase price (or even more to cover costs like stamp duty) without needing a cash deposit. The guarantor’s property acts as additional security, reducing the lender’s risk and often eliminating the need for LMI.

How It Differs from a Standard Home Loan

In a standard home loan, if you have less than a 20% deposit, lenders usually require LMI, which protects them if you default. With a family guarantee, the guarantor’s equity replaces the cash deposit and LMI. The loan is typically structured as two parts: a main loan secured by your new property, and a smaller guarantee loan secured by the guarantor’s property. Over time, as you pay down the loan and your property value increases, the guarantee can be released.

How Does a Family Guarantee Loan Work?

Here’s a step-by-step breakdown of the process:

Application: You apply for a home loan with a guarantor. The lender assesses your income, expenses, and credit history, as well as the guarantor’s property equity and financial situation.
Valuation: The lender values both your intended property and the guarantor’s property to determine available equity.
Loan Structure: The loan is split. For example, if you buy a $500,000 property, you might borrow $400,000 (80%) against your new home and $100,000 (20%) against the guarantor’s property. This avoids LMI because the combined loan-to-value ratio (LVR) is effectively 80%.
Settlement: Funds are disbursed, and both properties are mortgaged to secure the loans.
Repayment: You make repayments on the entire loan. Once the guaranteed portion is paid down or your property value rises enough to reach an 80% LVR on your own property, you can apply to release the guarantor.

Example Scenario

Item	Amount
Property purchase price	$600,000
Main loan (80% of purchase)	$480,000
Guarantee loan (20% of purchase)	$120,000
Total loan amount	$600,000
Your cash deposit	$0
LMI	$0
Guarantor’s property value	$800,000
Guarantor’s existing mortgage	$200,000
Available equity for guarantee	$440,000 (80% of $800k minus $200k)

In this case, the guarantor has enough equity to cover the $120,000 guarantee. The borrower buys the home with no deposit and no LMI.

Eligibility Criteria for Borrowers and Guarantors

Borrower Eligibility

Age: Typically over 18, with a stable income.
Credit history: Good credit score, no recent defaults.
Income: Must demonstrate ability to service the entire loan. Lenders use serviceability calculators considering your income, expenses, and other debts.
Residency: Australian citizens or permanent residents usually; some lenders accept certain visa holders.
Property type: Must be an acceptable residential property (house, unit, apartment).

Guarantor Eligibility

Relationship: Usually parents, but some lenders accept siblings, grandparents, or even aunts/uncles.
Property ownership: Must own a property with sufficient equity (often at least 20% equity after the guarantee).
Age: Under 65-70 (varies by lender). Older guarantors may face restrictions.
Financial position: Must have stable income or assets to cover their own debts and the potential guarantee.
Legal advice: Many lenders require guarantors to obtain independent legal advice before signing.

Benefits of a Family Guarantee Loan

No deposit needed: Enter the market sooner without years of saving.
Avoid LMI: LMI can cost thousands; a guarantee eliminates this expense.
Potentially better interest rates: Some lenders offer competitive rates for low-LVR loans.
Faster entry: With a guarantee, you can buy now rather than waiting to save a 20% deposit.
Guarantor release: The guarantee is not permanent; it can be removed once you have enough equity.

Risks and Considerations

Miniature wooden house with keys and contract symbolizing real estate transactions.

For Borrowers

Higher debt: Borrowing 100% means larger repayments and more interest over time.
Negative equity risk: If property values fall, you may owe more than the home is worth, making it hard to refinance or sell.
Relationship strain: Financial arrangements with family can cause tension if things go wrong.

For Guarantors

Liability: If the borrower defaults, the guarantor is responsible for the guaranteed amount. The lender can sell the guarantor’s property to recover the debt.
Reduced borrowing power: The guarantee may limit the guarantor’s ability to borrow for themselves.
Equity lock: The guaranteed portion of equity is tied up until released.

Mitigation Strategies

Limited guarantee: Most lenders offer a limited guarantee, capping the guarantor’s liability to a specific amount rather than the entire loan.
Insurance: Some lenders offer protection insurance for guarantors.
Exit strategy: Have a clear plan for releasing the guarantee, such as through property value growth or extra repayments.

How to Release a Guarantor

Releasing a guarantor typically requires:

Loan-to-value ratio (LVR): Your property’s LVR must fall below 80% (or the lender’s threshold) based on a current valuation.
Repayment history: Consistent, on-time repayments over a period (usually 6-12 months).
Application: You apply to the lender for a release; they may re-assess your financial situation.
Valuation: A new valuation of your property is often required (you may bear the cost).
Legal process: The lender removes the guarantee and discharges the mortgage on the guarantor’s property.

Alternatives to Family Guarantee Loans

If a family guarantee isn’t feasible, consider these options:

First Home Owner Grant (FHOG): State-based grants and stamp duty concessions for first home buyers.
First Home Loan Deposit Scheme (FHLDS): Government scheme allowing eligible buyers to purchase with a 5% deposit without LMI (limited places).
Shared equity schemes: State government programs where the government co-owns a portion of your home.
LMI with a low deposit: Paying LMI can still be a viable path if you have at least 5-10% deposit.
Saving a larger deposit: Delaying purchase to save 20% avoids LMI and reduces debt.

Steps to Apply for a Family Guarantee Loan

Assess your situation: Check your credit score, income, and expenses. Use online calculators to estimate borrowing power.
Talk to family: Discuss the arrangement openly with potential guarantors, ensuring they understand the risks.
Research lenders: Not all lenders offer family guarantee loans; compare features, rates, and release conditions.
Get professional advice: A mortgage broker can help find suitable lenders and structure the loan. Guarantors should seek legal advice.
Pre-approval: Apply for conditional approval to know your budget.
Property search: Find a property within your approved range.
Formal application: Submit all documents, including guarantor details and property valuations.
Settlement: Sign loan documents and complete the purchase.

FAQ

Can a family guarantee loan be used for investment properties?

Yes, some lenders allow family guarantee loans for investment purchases, but policies vary. The borrower must still meet serviceability requirements, and the guarantor’s property is typically their owner-occupied home. Check with your lender or broker.

What happens if the borrower can’t make repayments?

If the borrower defaults, the lender will first attempt to recover the debt from the borrower’s property. If the sale doesn’t cover the full debt, the lender can then pursue the guarantor for the guaranteed amount, which may involve selling the guarantor’s property. This is why a limited guarantee is crucial.

How long does it take to release a guarantor?

It depends on how quickly you can reduce the LVR on your property. With extra repayments or property value growth, it could take 2-5 years. Some lenders require a minimum period (e.g., 12 months) before considering release.

Do all lenders offer family guarantee loans?

No, not all lenders have this product. Major banks like Commonwealth Bank, Westpac, and some non-bank lenders offer variations. It’s best to consult a mortgage broker who can compare options.

Is a family guarantee loan only for first home buyers?

While commonly used by first home buyers, these loans are also available to subsequent buyers, refinancers, or even those building a home, provided they meet lender criteria.

References

Australian Securities & Investments Commission (ASIC) - MoneySmart: “Guarantor home loans” (2024). https://moneysmart.gov.au/home-loans/guarantor-home-loans
Commonwealth Bank of Australia: “Family Support Guarantee” (2024). https://www.commbank.com.au/home-loans/family-support-guarantee.html
Westpac Banking Corporation: “Family Guarantee” (2024). https://www.westpac.com.au/personal-banking/home-loans/guarantor/
National Housing Finance and Investment Corporation (NHFIC): “First Home Loan Deposit Scheme” (2024). https://www.nhfic.gov.au/what-we-do/first-home-loan-deposit-scheme/
Australian Banking Association: “Family pledge loans” (2023). https://www.ausbanking.org.au/for-customers/family-pledge-loans/