Key Takeaway

A family guarantee (also called family security or guarantor loan) lets you buy a home with a smaller deposit by using a parent’s or relative’s property as additional security. This arrangement can reduce or eliminate lenders mortgage insurance (LMI), lower your upfront costs, and help you enter the market sooner. The guarantor pledges part of their property’s equity to cover the shortfall in your deposit, but they do not make your repayments and face real financial risk if you default.

What Is a Family Guarantee?

A family guarantee is a home loan arrangement in which a family member (usually a parent) uses the equity in their own property to act as additional security for your home loan. This allows you to borrow with a smaller deposit than the standard 20 per cent typically required to avoid lenders mortgage insurance.

The guarantor does not give you money directly or make your loan repayments. Instead, they offer their property as collateral to cover the portion of the loan that exceeds 80 per cent of your property’s value. If you default on the loan, the lender can pursue the guarantor’s property to recover the debt.

According to ASIC MoneySmart, a guarantor arrangement is a serious financial commitment that carries significant risk for the person providing the guarantee (MoneySmart, 2026).

Why Family Guarantees Matter

For first home buyers, saving a 20 per cent deposit plus costs can take years. A family guarantee solves two problems at once: it lets you buy sooner with a smaller deposit (sometimes as low as 5 per cent or even zero in some cases), and it eliminates or reduces LMI, which can cost thousands of dollars on a high loan-to-value ratio (LVR) loan.

LMI is a one-off premium charged by lenders when your deposit is less than 20 per cent. On a A$500,000 home with a 10 per cent deposit, LMI can exceed A$10,000. A family guarantee removes this cost by bringing the effective LVR down to 80 per cent or lower from the lender’s perspective, even though you contribute a smaller deposit.

How Family Security Works

The guarantor uses equity in their property to secure part of your loan. Most lenders offer a limited guarantee, in which the guarantor is liable only for a specific portion of the loan (typically 20 to 25 per cent of the property value), rather than the entire debt. This is safer for the guarantor than an unlimited guarantee, which covers the full loan amount.

For example, if you buy a A$600,000 home with a 5 per cent deposit (A$30,000), you borrow A$570,000. The lender may require a guarantee of A$120,000 (20 per cent of the property value) to bring the effective LVR to 80 per cent. The guarantor’s property secures that A$120,000 portion, and the remainder is secured against your new home.

The guarantee is registered as a mortgage or caveat over the guarantor’s property. The guarantor does not make your repayments, contribute to your deposit, or own a share of your property. Their role is purely as security.

As foundational texts such as Principles of Finance explain, collateral arrangements reduce lender risk by providing an additional claim on assets if the borrower defaults.

Types of Guarantee

Most Australian lenders offer limited guarantees, capping the guarantor’s liability at a set dollar amount or percentage. This protects the guarantor from unlimited exposure and is the most common structure.

Unlimited guarantees, in which the guarantor is liable for the entire loan balance, are less common and significantly riskier. Few lenders require this, and guarantors should avoid it wherever possible.

Some lenders also allow guarantees over cash or term deposits rather than property, though this is less common.

Risks for the Guarantor

The guarantor takes on serious financial risk. If you cannot make your repayments and default, the lender can pursue the guarantor’s property to recover the debt. This can result in the guarantor being forced to sell their home or refinance to pay out the debt.

Read also: How to Avoid or Reduce Lenders Mortgage Insurance (LMI) in Australia

The guarantee also affects the guarantor’s borrowing capacity. Because the guarantee is recorded as a potential liability, it may limit the guarantor’s ability to borrow for their own purposes until the guarantee is released.

Relationships can also be strained if financial difficulties arise. Guarantors should seek independent legal and financial advice before agreeing, and borrowers should have a clear plan to release the guarantee as soon as possible.

The Process

To arrange a family guarantee, the borrower and guarantor both apply through the lender. The lender assesses the borrower’s serviceability (income, expenses, credit history) to ensure they can afford the repayments, and assesses the guarantor’s property to confirm sufficient equity.

The guarantor must obtain independent legal advice before signing the guarantee. This is a regulatory requirement designed to ensure the guarantor understands the risks and obligations.

Once approved, the guarantee is registered against the guarantor’s property, and the home loan settles. The borrower makes repayments as normal, and the guarantor is not involved in the day-to-day loan unless a default occurs.

Releasing the Guarantee

Most borrowers aim to release the guarantee within a few years. This typically happens when the LVR falls to 80 per cent or lower, either through property value growth, principal repayments, or a combination of both.

For example, if your property increases in value or you pay down enough of the loan to reach 80 per cent LVR, you can refinance or request the lender to remove the guarantee. The lender will require a new valuation and may charge a fee to release the guarantee and discharge the mortgage from the guarantor’s property.

Releasing the guarantee restores the guarantor’s full borrowing capacity and removes their liability.

Alternatives to Family Guarantees

If a family guarantee is not suitable, first home buyers may consider the First Home Loan Deposit Scheme, which allows eligible buyers to purchase with a deposit as low as 5 per cent without paying LMI, with the government acting as guarantor (NHFIC, 2026).

Other options include saving a larger deposit to avoid LMI, applying for a low-deposit loan and paying the LMI premium, or combining smaller deposits from joint borrowers.

Conclusion

A family guarantee is a powerful tool for first home buyers who want to enter the market sooner without the burden of lenders mortgage insurance. By using a parent’s or relative’s property as additional security, you can borrow with a smaller deposit and save thousands of dollars in upfront costs. However, the arrangement carries real risk for the guarantor, and both parties should seek independent advice and have a clear plan to release the guarantee once the LVR improves. Confirm your eligibility, limits, and costs with a licensed mortgage broker or lender, as terms and availability vary by lender and your personal circumstances.

General Advice Warning: This information is general in nature and does not consider your objectives, financial situation, or needs. You should consider obtaining personal advice from a licensed mortgage broker or financial professional before acting on it. This is not personalised financial or legal advice. Interest rates, fees, eligibility, and lenders mortgage insurance vary by lender, product, and your circumstances. Confirm current terms with a licensed lender or mortgage broker before making a decision.