Parental Guarantee Loans: What They Can Do, and Their Limits

The short answer

A parental guarantee, also called a family guarantee, lets your parents use the equity in their own property to help you buy, even if you have a minimal deposit. With specific lenders, you can borrow up to 100%, including stamp duty.

It can get you into the market years sooner. But it’s a serious commitment for your parents, and it comes with limits worth understanding before you start.

How it works

Your new home secures most of the loan. Your parents’ property is used as extra security for the rest, usually the portion above 80% of your home’s value. This is called a limited guarantee, because your parents only guarantee that portion, not the whole loan.

Example: Ella buys an $800,000 home with no deposit.

	Amount
Loan secured by Ella’s new home (80%)	$640,000
Portion guaranteed by her parents’ property (20%)	$160,000
Total loan	$800,000

Ella’s parents aren’t responsible for her full loan. Their guarantee is limited to the $160,000 portion.

What it can do

• Borrow up to 100%: with specific lenders, including stamp duty, so you can buy with a minimal deposit.
• Avoid LMI: the guarantee covers the gap above 80%, so there’s no lenders mortgage insurance to pay.
• Get in sooner: you can buy now, rather than spending years saving a 20% deposit.

Its limitations

• You still need to afford the loan: the end borrowing amount is subject to your own income and expenses. A guarantee helps with the deposit, not with servicing.
• Only specific lenders offer it: each has its own rules on who can be a guarantor and what property they’ll accept as security.
• Your parents can’t sell freely: while the guarantee is in place, your parents can’t sell or refinance their property without paying off or releasing the guaranteed portion.
• Risk to your parents: if you can’t make your repayments, the lender can call on the guarantee. It may also affect your parents’ ability to borrow for themselves.
• Independent legal advice: guarantors are usually required to get their own legal advice before signing, so they fully understand what they’re agreeing to.

Releasing the guarantee

A parental guarantee doesn’t have to last forever. The goal is to release it once your loan is 80% or less of your home’s value.

Meet in the middle: you don’t need to rely on repayments alone. Over time, paying down your loan and growth in your home’s value work together, and they can meet in the middle.

Example: a few years after buying, Ella has paid her loan down to $760,000, and her home is now valued at $950,000. 80% of $950,000 is $760,000, so the guarantee can be released.

Getting the best valuation: valuations can differ between lenders. We can order valuations from different banks to find a higher one, which can help release the guarantee sooner.

Alternatives

• A gifted deposit: parents gift some of the deposit instead, with no ongoing link to their property.
• The 5% Deposit Scheme: eligible first home buyers can buy with a 5% deposit and no LMI. See our first home buyer schemes lesson.
• Paying LMI: borrowing above 80% with LMI, without involving your parents’ property.

Thinking about a parental guarantee?

With access to over 40 lenders, our team of lending specialists can find the right guarantor lender, structure the guarantee to protect your parents as much as possible, and help you release it as soon as you can.

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General information only. This article does not consider your objectives, financial situation or needs and is not credit, financial or legal advice. Guarantor policies vary by lender. Guarantors should seek independent legal and financial advice before agreeing to a guarantee. Examples are illustrative. Insight Property Finance.