Buying your first home can be challenging, particularly when saving a large deposit while also managing rising property prices and the cost of living.
If you have a parent or close family member who is willing and able to help, a parental guarantee may allow you to purchase a home sooner without needing a full deposit.
How does a parental guarantee work?
A parental guarantee allows a family member, most commonly a parent, to use part of the equity in their own property as additional security for your home loan.
Rather than lending you money, they are guaranteeing part of the loan.
This may allow you to:
- Purchase a home with a smaller deposit
- Avoid paying Lenders Mortgage Insurance (LMI), depending on your circumstances
- Enter the property market sooner
The guarantee is generally limited to a portion of the loan rather than the full amount. Different lenders offer family guarantee arrangements with varying eligibility criteria and conditions. You can learn more from the Australian Government’s Moneysmart website and major lenders including Commonwealth Bank, Westpac, ANZ, and NAB.
Does my parent become responsible for my entire loan?
Not usually.
Most guarantees are limited to a specific amount, often enough to reduce the lender’s risk until your loan reaches an acceptable loan to value ratio.
If you continue making your repayments and the value of your property grows, the guarantee can often be removed once the loan balance falls below around 80% of the property’s value. The exact requirements vary between lenders.
What should parents consider?
Providing a guarantee is a significant financial commitment.
If repayments are not maintained and the property needs to be sold, the guarantor may be required to cover the guaranteed portion of the debt.
For this reason, lenders generally require guarantors to obtain independent legal advice before proceeding.
It is also important to consider how providing a guarantee may affect future borrowing capacity or broader financial plans.
Is a parental guarantee the right option?
A parental guarantee can be an effective way to help children enter the property market sooner, but it should always be considered as part of a broader financial strategy.
At You First, we help families understand how lending decisions fit alongside tax, wealth creation, superannuation and long term financial planning, so everyone involved understands both the opportunities and the responsibilities.
If you’re considering using a parental guarantee, or you’re a parent thinking about helping your children into their first home, we’re always happy to have a conversation.
The information in this article was accurate at the time of publication and is intended as general information only. It does not take into account your personal objectives, financial situation or needs. Laws, regulations and lending policies may change over time, so you should seek professional advice before making financial decisions.