For many home buyers, saving for a large deposit can be a significant hurdle.

One way to overcome this challenge is by using a family pledge or family guarantee loan. These options can help you secure a mortgage with a smaller deposit and avoid paying Lenders Mortgage Insurance (LMI).

What is a Family Pledge or Family Guarantee Loan?

A family pledge or family guarantee loan involves a family member, usually a parent, using the equity in their own property as security for part of your home loan. This additional security can help you secure a larger loan or reduce the amount of deposit needed, potentially avoiding LMI.

How Does it Work?

Equity as Security: Your family member offers their property (or part of it) as additional collateral for your home loan. This doesn’t mean they are giving you money, but rather they are allowing the lender to use their property as a security in case you default on your loan.

Secured Amount: The guarantee usually covers the amount needed to bring your deposit up to 20%. For example, if you have a 5% deposit, the guarantee will cover the remaining 15% to avoid LMI.

Loan Structure: Your home loan is divided into two parts: one secured by your property and the other by the guarantor’s property. This helps reduce the loan-to-value ratio (LVR) and can make your loan more favourable.

Benefits of a Family Pledge or Family Guarantee Loan

Avoid Lenders Mortgage Insurance (LMI): By using a family guarantee, you can avoid the costly LMI, saving thousands of dollars.

Buy Your First Home Sooner: You can purchase your home sooner without needing to save a full 20% deposit.

Borrow More: It might allow you to borrow a larger amount, making it easier to buy the home you want.

No Cash Required. The guarantor doesn’t need to provide cash, only the equity in their property.

Risks and Considerations

Risk to Guarantor: If you default on your loan, the guarantor’s property is at risk. They might need to cover the shortfall or even face losing their home.

Relationship Strain: Financial agreements can strain relationships, so it’s essential to have clear communication and understanding.

Partial Guarantee Release: As you pay down your loan and your property’s value increases, you can apply to release the guarantor from the guarantee, reducing their risk over time.

Legal and Financial Advice: Both you and your guarantor should seek independent legal and financial advice to understand the implications fully.

Steps to Apply for a Family Guarantee Loan

Assess Eligibility: Ensure your guarantor has sufficient equity in their property and meets the lender’s criteria.

Choose a Lender: Not all lenders offer family guarantee loans, so find one that does.

Application Process: Apply for the loan, including details of your guarantor and their property.

Loan Approval: Once approved, the lender will outline the terms and the guarantor’s obligations.

More Information

Information for Guarantors