Family Pledge / Family Guarantee — Fact Sheet
Source document
This fact sheet is reproduced for general information purposes only.
It is an industry-standard explanatory document and has not been authored by Model Mortgages.
It does not provide personal advice.
Family pledge / family guarantee
Saving the deposit for a first home can be difficult and may take many years.
One way some borrowers may be able to enter the property market sooner is by having a family member act as a guarantor.
Many lenders allow parents or other close family members to use the equity in their property as security for part of a home loan, instead of the borrower needing to save the full deposit.
The person providing this support is known as a guarantor.
How does it work?
With a family pledge guarantee, a family member offers part of the equity in their property as security for your loan.
This can reduce the deposit required and may allow you to avoid paying Lenders Mortgage Insurance (LMI).
Example
If you are buying a property for $600,000:
- A 5% deposit would be $30,000
- To avoid LMI, a 20% deposit of $120,000 would usually be required
This means you would normally need to save an additional $90,000.
If your parents own a property valued at $900,000 and have sufficient equity, they may offer $90,000 of their equity as security for your loan — not as cash, but as additional security.
This allows the lender to treat the loan as though you have a 20% deposit, even though you have only contributed 5% in cash.
Once the equity in your property reaches 20%, you and your parents can apply to the lender to have the guarantee released.
The guarantor’s property does not secure the entire loan — only the guaranteed portion.
How is this different to being a co-borrower?
A co-borrower is responsible for the entire loan until it is fully repaid.
A guarantor is only responsible for the specific amount covered by the guarantee.
Once the guarantee is released, the guarantor has no further responsibility, even though the loan continues.
Who can be a guarantor?
Guarantors are generally limited to immediate family members, such as:
- parents
- grandparents
- siblings
The guarantor must usually:
- have sufficient equity in their property
- demonstrate an acceptable financial position
For example, if a guarantor’s property is valued at $900,000 but they owe $800,000, there may not be enough equity available to support a guarantee.
Benefits for first home buyers
A family guarantee may:
- help avoid or reduce Lenders Mortgage Insurance (LMI)
- reduce the amount of savings required for a deposit
- allow entry into the property market sooner
- enable purchase of a preferred property rather than a lower-priced alternative
It is important to note that the borrower must still be able to service the entire loan from their own income.
Considerations for guarantors
Being a guarantor is a significant financial commitment and involves risk.
If the borrower is unable to meet loan repayments, the guarantor may be required to cover the guaranteed portion of the loan.
In serious cases, this could place the guarantor’s own property at risk.
This is particularly important for guarantors approaching retirement, as their financial position could be impacted if repayments need to be made on behalf of the borrower.
Understand your obligations
Both the borrower and the guarantor must clearly understand:
- how much of the loan is guaranteed
- when the guarantee can be released
- what happens if repayments cannot be met
Most lenders require guarantors to obtain independent legal advice before entering into a guarantee.
This helps ensure everyone understands the risks and obligations involved.
More information
Normal lending criteria and lender policies apply to family guarantee loans.
Borrowing eligibility should be discussed with a mortgage broker.
This fact sheet is intended to help explain the concept and highlight key considerations — it is not a substitute for professional advice.
Disclaimer
The information provided in this fact sheet is not legal, taxation, or financial planning advice.
It has been prepared without considering your objectives, financial situation, or needs.
All loan products are subject to lender criteria and approval. Fees, terms, and conditions apply.
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