How does a family guarantee work in helping to purchase a house

With property prices rising faster than most people can save, some buyers are turning to parents and other family members for more than just real estate advice. Saving a typical 20% deposit can require setting aside hundreds of thousands of dollars, while still managing everyday expenses and cost-of-living pressure. Even high-income earners can find it out of reach. That’s why a family guarantee is becoming a popular option.

At First Financial, we help clients retire with confidence through highly personalised financial plans built around their goals, dreams and aspirations. For many, that includes supporting children or other family members as they take their first steps into the property market. If helping family is part of your plan, we can guide you beyond traditional lending paths and create opportunities for them to buy sooner while protecting your financial security.

A family guarantee is a way for a homebuyer to secure a loan without needing a full deposit. Instead of providing extra cash, a family member offers part of their own home equity as additional security to the bank. This helps the buyer borrow more, avoid costly Lenders Mortgage Insurance (LMI) and enter the market sooner, while the guarantor does not have to hand over any money or make loan repayments.

To get a better understanding of what a family guarantee is and how it works, we spoke with George Katrantzis, Lending Specialist at Akambo Lending Solutions, an affiliated business of First Financial.

While siblings or other family members can step in, a family guarantee is most commonly provided by parents for their children.

As George Katrantzis explains, “typically, a guarantee from a family member is required when the applicant doesn’t have at least a 20% deposit plus the stamp duty, so they can avoid lenders mortgage insurance.” The guarantee covers the shortfall between what the borrower has saved and the full deposit and cost requirements. It is also “limited,” meaning it applies only to the agreed portion of the loan, not the full debt.

Borrowers can sometimes borrow up to 100% of the property value plus costs, provided they can afford the full repayments. The lender secures the main loan against the new property being purchased, and takes a limited guarantee over the guarantor’s property to cover the deposit shortfall. Depending on the lender’s policy, the loan may be structured as one facility or split into two parts (one mortgage registered over the new property and another over the guarantor’s property for the guaranteed amount). In either case, the borrower must show they can service the entire loan amount.

The guarantor is not a co-borrower. The borrower alone is responsible for all repayments and ongoing obligations. As George explains, “The guarantor doesn’t appear on the loan as a borrower in any way, shape or form. They’re literally only pledging their security as guarantee, and they don’t have a loan facility or repayment requirement on an ongoing basis.”

While an insufficient deposit is usually the reason for considering a family guarantee, some borrowers have saved a reasonable amount but prefer to keep those funds as a financial buffer for renovations or other expenses, rather than using all their cash upfront. However, whether using a family guarantee to supplement savings or to enter the market sooner, both the borrower and the guarantor must meet strict lending criteria.

Firstly, guarantors must have enough equity in their property, taking into account any existing mortgage secured against it. Most banks will allow a guarantee of up to 70% of the property’s market value. For example, if a parent owns a home worth $1 million and has a $200,000 mortgage, the amount available to guarantee would generally be $500,000, calculated as 70% of the value ($700,000) minus the existing mortgage.

When it comes to eligibility, different lenders have their own rules and criteria. Some will only allow guarantees for first home buyers, in an effort to support genuine home ownership rather than wealth building. Others may exclude guarantors who are pensioners or receiving government benefits. Speaking about the varying rules, George says, “We can obviously create the right solution for a client based on their circumstances.”

Saving a full deposit is becoming harder for many buyers, especially once stamp duty is factored in. As George explains, “the ability to be able to save is not significant enough, especially in that above $750,000 range, because then you’re paying full stamp duty and still need to come up with the deposit.” A family guarantee can help buyers enter the market sooner without waiting years to build up savings.

Using a family guarantee not only helps buyers avoid Lenders Mortgage Insurance (LMI), it also gives them access to the same competitive interest rates they would have received if they had saved a full 20% deposit themselves. George says, “There is no disadvantage to the client at all. They’re getting just as competitive a rate as if they had the full 20% plus stamp duty.”

When it comes to risk, guarantors are only putting their property equity on the line. If the borrower defaults, the bank will first sell the property to recover the loan. If the sale does not cover the full amount owed, the lender can then pursue the guarantor for the shortfall. George emphasises that while this outcome is extremely rare, it is something families should consider carefully before proceeding.

Some lenders also require guarantors to seek independent legal advice to ensure they fully understand the potential risks and obligations. Even if this is not required, we strongly encourage seeking this advice.

Before committing to a family guarantee, families should explore all their options. One alternative we often discuss with First Financial clients is gifting. A financial gift can remove the need for ongoing obligations tied to the guarantor’s property, creating a simpler and cleaner arrangement. “It’s imperative from our perspective that we have a conversation separately with the guarantor,” says George, “and we put all of those cards on the table. It’s also good to ensure there is no conflict of interest and that their consent is fully informed.”

A family guarantee does not have to stay in place for the life of the loan. Often within a few years, the borrower builds enough equity in their home to remove the need for the guarantee.

At First Financial, we conduct regular reviews—typically every two to three years—to assess whether the guarantor can be released from the arrangement.

“When loans go down in value and property prices go up, that divergence actually is even greater, and therefore you can potentially release the property after two or three or four years.”

A family guarantee can be a powerful way to open the door to home ownership for family members with strong incomes and good serviceability, but who are struggling to save a deposit. In today’s economic climate, it is becoming more common for buyers to have the income to support a loan but not the savings needed to secure it.

It’s important to speak with a financial adviser to assess whether a family guarantee is the right fit for your personal circumstances and long-term goals. At First Financial, we tailor every financial plan to support both your current needs and your life post-retirement, ensuring any strategy we recommend keeps you on track to get where you want to be.

To learn more about how a family guarantee could help you support a family member into their first home, contact a member of our team today.

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