Family Guarantee Loans Explained: Buying with Help from Parents

What is a Family Guarantee?

A family guarantee allows a family member to use equity in their property as security for your home loan. We also refer to this as a parental guarantee or family security guarantee depending on the lender. This strategy helps you buy with a smaller deposit or avoid Lenders Mortgage Insurance (LMI).

It has become a vital tool in the current Australian market. Data suggests the “Bank of Mum and Dad” is now one of the country’s largest lenders, helping thousands enter the market annually.

How Family Guarantees Work

The Basic Structure

Instead of you providing a 20% deposit to avoid LMI, a family member guarantees a portion of your loan using their property as additional security.

The bank essentially takes a mortgage over two properties. They hold the title to the home you are buying and a limited mortgage over the guarantor’s home.

Example Scenario:

• Property purchase price: $500,000
• Your deposit: $25,000 (5%)
• Amount needed to avoid LMI: $100,000 (20%)
• Shortfall: $75,000
• Family member guarantees: $75,000 plus a buffer (often limited to roughly $90,000 total)
• Their property secures: Only that limited portion, not the whole loan

This structure delivers three immediate results:

1. You buy with a 5% deposit.
2. You avoid paying LMI (saving roughly $15,000 to $31,000 depending on the purchase price).
3. You access standard interest rates rather than higher “low deposit” rates.

Limited Guarantee vs Full Guarantee

Limited Guarantee (Most Common): We almost exclusively recommend this structure. The guarantor only secures a specific portion of your loan. Their exposure is capped at a fixed dollar amount. Once you pay down the loan or your property increases in value to reach 80% Loan-to-Value Ratio (LVR), the guarantee can be released.

Full Guarantee (Rare): Some older loan products used this method where the guarantor secured the entire loan amount. This creates significantly higher risk for the guarantor. Most modern lenders and brokers avoid this to protect the parents’ assets.

Benefits of Family Guarantees

For the Buyer (Child)

The advantages for the buyer are immediate and financial.

• Buy sooner: You do not need to wait years to save a full 20% deposit.
• Avoid LMI: On a $600,000 purchase with a 5% deposit, LMI can cost over $23,000 according to 2025 estimates from providers like Helia. You save this upfront cost entirely.
• Better rates: Lenders view loans under 80% LVR as lower risk. You often qualify for rates 0.50% to 1.00% lower than buyers with small deposits.
• Keep savings: You can keep a cash buffer for renovations or emergencies rather than draining every cent for the deposit.
• Enter the market: You secure a property price today rather than chasing rising prices while you save.

For the Guarantor (Parent)

Parents often prefer this method over giving cash.

• Help without cash: You do not need to liquidate assets or hand over $50,000 in cash.
• Limited risk: Your exposure is capped at a specific amount agreed upon at the start.
• Temporary arrangement: The guarantee is not for the life of the loan. It is usually released within 2 to 5 years.
• Asset protection: You retain your savings and investments while still helping your child succeed.

Risks and Considerations

Risks for the Guarantor

Financial Risk: If the borrower cannot make payments and the property must be sold at a loss, the bank may call on the guarantee. The guarantor would be liable to pay the shortfall up to the limited guarantee amount.

Impact on Borrowing: Lenders view the guarantee as a contingent liability. If you plan to buy an investment property or upgrade your own home soon, this guarantee reduces your borrowing capacity.

Relationship Risk: Money matters can strain family dynamics. We see tension arise if expectations are not clear regarding repayments or the timeline for releasing the guarantee.

Limited Control: You generally do not have a say in whether the borrower sells the property or how they manage the loan repayments.

Mitigating Guarantor Risks

There are specific ways to structure this to protect the parents.

1. Limited guarantee: Always insist on a guarantee limited to a specific dollar figure.
2. Strong borrower assessment: We stress test the borrower’s income to ensure they can afford repayments comfortably without relying on the guarantee.
3. Buffer in the guarantee amount: Including a small buffer protects the guarantor if the property market dips slightly.
4. Regular review: Set a calendar reminder to review the property value annually.
5. Independent legal advice: The guarantor must see their own solicitor. This ensures they fully understand the commitment without pressure from the borrower.

Who Can Be a Guarantor?

Typical Requirements

Relationship: Most lenders restrict this to parents. Some banks allow immediate family such as siblings or grandparents, but this is less common. We check specific lender policies if you need to use a non-parent relative.

Property: The guarantor must own property in Australia. It can be their home or an investment property. They must have enough “useable equity” in that property. Generally, banks want to see that the parents retain at least 20-30% equity in their own home after the guarantee is in place.

Financial Position: Guarantors generally need to be working or self-funded retirees with a clear asset position. Lenders need to see that you could theoretically service the guarantee amount if called upon.

Legal Requirements: The bank will require a solicitor’s certificate. This proves the guarantor received independent advice and signed voluntarily.

The Process

Step 1: Assessment

We analyze the borrowing capacity of the child and the equity position of the parents. This confirms the numbers work before anyone gets their hopes up.

Step 2: Application

You submit the loan application containing details for both the borrowers and the guarantors.

Step 3: Valuations

The lender orders valuations for both properties. They need to confirm the value of the home being purchased and the equity available in the guarantor’s home.

Step 4: Legal Advice

Guarantor receives independent legal advice. Expect to pay between $600 and $1,000 for this service depending on your solicitor. This step is mandatory and protects the parents.

Step 5: Documentation

All parties sign the loan and guarantee documents.

Step 6: Settlement

The purchase settles. The guarantee is now active.

Step 7: Ongoing Management

You make your regular mortgage repayments. We monitor the market to identify the earliest possible moment to release the guarantee.

Releasing the Guarantee

The goal is to remove the guarantee as soon as possible. We find that most families exit this arrangement within 3 to 5 years.

When Can It Be Released?

Option 1: Equity Growth This is the most common exit strategy. If your property value increases by 10-15%, you may naturally drop below 80% LVR.

Option 2: Aggressive Repayments You can make extra repayments to pay down the loan balance. Once the debt is under 80% of the property value, we can apply to remove the guarantee.

Option 3: Additional Security If you accumulate other assets or cash, you can offer those as a substitution to release the parent’s property.

Typical Timeline

Market conditions dictate the speed of release.

• Rising Market: Release can happen in 2-3 years.
• Flat Market: Release may take 4-5 years relying on principal reduction.

We proactively recommend a valuation check every 12 months to see if the guarantee can be lifted.

Family Guarantee vs Other Options

vs Saving a Larger Deposit

Factor	Family Guarantee	Wait to Save
Buy now	Yes	No
Save on LMI	Yes	Yes
Risk to family	Yes	No
Property growth	Benefit from appreciation	Risk paying higher prices
Rent paid	Reduced (paying own mortgage)	Continues (paying landlord)

vs Parent Gifting Deposit

Factor	Family Guarantee	Gift
Parent loses money	No (unless borrower defaults)	Yes (capital is gone)
Documentation	More complex	Simpler (Statutory Declaration)
Centrelink Impact	Generally none	May affect pension (Gifting Rules)
Parent’s options	Retains access to equity	Lost capital

vs Parent Lending Deposit

Factor	Family Guarantee	Private Loan
Repayment required	No	Yes
Affects borrowing power	Less impact	Reduces serviceability
Relationship complexity	Moderate	High
Formal agreement	Bank manages	You manage

Questions Families Should Discuss

Before proceeding with a family guarantee, sit down and discuss these questions honestly.

1. Can the borrower genuinely afford the repayments? Look at the budget with a buffer. If interest rates rise by 2%, can the borrower still pay without stress?

2. What happens if circumstances change? Discuss plans for job loss, illness, or relationship breakdown. Is there income protection insurance in place?

3. Does the guarantor understand the risks? This is not just a signature. It is a financial commitment. Parents must be comfortable with the worst-case scenario.

4. Is this the right time? Sometimes waiting 6 months to save a slightly larger buffer is smarter than rushing in with zero savings.

5. Are other family members affected? Consider siblings. Will they feel their potential inheritance is being risked? Open communication prevents resentment later.

6. What’s the exit plan? Agree on a strategy. Will the borrower make extra repayments to release the guarantee early?

Gladstone Family Scenarios

We see family guarantees work effectively for specific local situations in the Gladstone region.

Young mining and industry workers: Many clients have high incomes from LNG or port-related work but lack a lump sum deposit. Parents help them secure a home now so they stop paying high rental yields common in our area.

First home buyers: We often help young buyers whose parents have paid off their homes in established suburbs. These parents can provide a limited guarantee without impacting their retirement lifestyle.

Returning to Gladstone: Adult children often move back to the region for work or family. Parents help them re-establish roots locally by bridging the deposit gap.

Key considerations:

• Market volatility: Gladstone property values can fluctuate. We ensure the guarantee buffer is sufficient to handle short-term valuation dips.
• Exit strategy: We plan the release based on conservative growth estimates.

Our Role in Family Guarantees

Our first home buyer loans service manages the entire process to protect both generations.

1. Assess the full picture: We analyze both the borrower’s serviceability and the guarantor’s asset position.
2. Explain risks clearly: We ensure parents are not pressured and understand exactly what a limited guarantee entails.
3. Structure appropriately: We insist on limited guarantees with suitable buffers rather than open-ended arrangements.
4. Find suitable lenders: Not all banks treat guarantees the same. We find lenders with the most favorable release policies.
5. Facilitate legal advice: We guide you toward solicitors who specialize in independent legal advice for guarantors.
6. Monitor for release: We set reminders to review your loan and property value to remove the guarantee as soon as possible.

We also have honest conversations about whether a family guarantee is actually the right choice. Sometimes, a different strategy serves the family better.

Thinking About a Family Guarantee?

This is a significant decision for your whole family. The right structure protects everyone while helping you achieve homeownership.

Book a free consultation to discuss your situation. We will assess whether a family guarantee suits your circumstances and explain exactly how it would work for your family.