Guarantor home loans

Your home secures the loan. A parent or another family member accepted by the lender provides extra security to cover the deposit shortfall. They usually keep ownership of their home and do not hand you cash.

You owe the money borrowed, including any buying costs added to the loan. The guarantee gives the bank someone else to call on if you default; it does not reduce your monthly repayments.

Ask for the proposed loan split, guarantee limit and security arrangement in writing. A limited guarantee can cap the family's responsibility, but the documents decide whether interest, fees or enforcement costs sit within that limit or can be added.

For an $800,000 purchase with no cash deposit, the buyer owes $800,000 before costs. The first 80% is $640,000, leaving a $160,000 deposit gap. Those figures explain the deposit gap; they do not set the legal guarantee amount. Lenders calculate the security they need differently.

The lender may split the borrowing into separate accounts. That can help you track the portion supported by family, but two accounts alone do not prove the guarantee is limited or that it will end when one account is paid down.

The diagram below uses a separate example: a $500,000 loan for a home valued at $500,000. The lender also accepts $125,000 of security from the parents' property, bringing the total security used in this calculation to $625,000.

Your own bank may not offer the right guarantee for your family. Even banks that offer one can disagree about who may help, how much security they need and which purchases qualify.

These are examples, not a full lender list. Read our Westpac review and CommBank review for more detail. I would compare the current options for your family before choosing a lender.

Both the borrower and the proposed guarantor need to fit the lender. I check the family relationship and property early, because a bank can accept the buyer but decline the guarantee.

Parents are a common option. Some lenders also accept siblings, adult children or other relatives. Retirement or an existing mortgage does not automatically rule someone out, but lender selection matters. Friends and more distant relationships need checking before you rely on their help.

Joint owners, separated parents and family living overseas can need extra checks. Read who can be a guarantor for the relationship and property issues.

Some loans allow no cash deposit if the accepted security is enough. Other lenders want genuine savings or evidence of how you have managed money, such as an acceptable rental history. We need to check both the savings rule and the cash required at settlement.

Allow for transfer duty where payable, conveyancing, searches, inspections and loan costs. Some lenders may finance eligible costs above the purchase price. That is not an allowance for furniture, holidays or spending after settlement.

Our genuine savings guide explains the evidence lenders may ask for.

A family security guarantee may let you borrow a larger share of the price. Your own income still sets the limit on what you can repay. If the bank assesses that you can afford $450,000, adding a guarantee will not turn that into an $840,000 approval.

I would check debts, credit card limits and the way a lender counts your income if repayments are the obstacle. Our guide to guarantors and borrowing power explains the difference.

I compare the same purchase price and your available cash across the options. Avoiding LMI can save money, but it is only part of the decision when a parent's home is involved.

If you qualify for the 5% Deposit Scheme and have the cash required, I would compare it before involving your parents' home. See guarantor versus the 5% Deposit Scheme for the family risk and cost comparison.

A guarantee does not come with an automatic interest rate discount. Compare the written rate, fees, loan features and amount borrowed. A slightly lower rate on a much larger loan can still mean higher repayments.

Parents who want to own a share, lend money or sell a property to you below market value are making a different arrangement. Our guides to ways parents can help and buying with your parents explain those choices.

If your parents are selling you their property below market value, read our gifted equity guide for the deposit calculation, valuation and family-sale costs.

On an $800,000 home, a 20% deposit is $160,000 and a 5% deposit is $40,000, before buying costs. A guarantee may reduce the cash you need, but you still repay the extra money borrowed.

Cherise was trying to buy in Sydney and had a deposit shortfall. Her parents provided security, and her loan covered 105% of the property value, including eligible buying costs, without LMI.

Her example is useful when the deposit is only part of the cash shortfall. I would still show you what must be paid from savings, what the lender will finance and the resulting repayment before recommending the loan.

Your parents are accepting a financial obligation. If you cannot repay and the lender enforces the guarantee, they may have to pay the guaranteed debt. Their home can be at risk.

Even when you pay on time, the guarantee can affect their own plans to borrow, refinance, renovate, sell or help another child. I ask about those plans before the loan is structured.

Your parents should receive independent legal advice and have time to decide without pressure. Separate financial advice can help them judge the effect on their own position. If the benefit to you is small or the commitment is uncomfortable for them, I would look at another option.

Legal advice, valuations, mortgage registration and lender fees can add to the cost of setting up or releasing the guarantee. Get a written quote. The risks of going guarantor guide is written for the person offering their property.

Pre-approval is conditional. The property, valuation and guarantee still need acceptance, so leave enough time before a finance deadline. A guarantor application can involve an extra property valuation, another bank and independent legal advice.

We can review the guarantee as your loan falls or your property value changes. Around 80% loan to value ratio (LVR) is a common point to check: a $640,000 loan against a lender valuation of $800,000 is 80%.

The bank still has to approve the release. It may assess your finances, repayments and the security arrangement. Higher equity does not remove the guarantee by itself, and a higher salary alone does not mean the bank can release the supporting property.

I would work towards removing the guarantee within 5 years where your position allows it, while making sure the family understands it could remain longer. Obtain written confirmation of the release before relying on the parents' property being free. The guarantor removal guide covers the steps, costs and options above 80% LVR.