How does a family guarantee work?

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One of the biggest hurdles facing first-time homeowners is trying to scrape together enough cash for a house deposit. And even if you do manage to save up enough money to put towards your first home, it still might not be enough to make up a 20% deposit to beat lender’s mortgage insurance or a low deposit premium. But if you’re lucky enough to have a family member that’s willing to lend a helping hand, you might be able to bring them on as a guarantor. Here’s how it works.

What is a guarantor home loan?

A guarantor home loan works in a similar way to a regular home loan, just with a smaller deposit. With a guarantor loan, a family member of the buyer offers their own property as additional security for the loan. This helps to reduce the risk for banks and lenders.

Although the guarantor isn’t necessarily contributing cash towards the purchase, by contributing extra security toward your loan it can help take you up to the equivalent of a 20% deposit or more. Not to mention, a guarantor home loan can be a great way to avoid paying lender’s mortgage insurance (LMI) or a low deposit premium (LDP), which can save you thousands.

As the homeowner, it’s still on you to keep up with your mortgage repayments. If for whatever reason you’re no longer able to make your repayments, it could fall on your guarantor to pick up the slack. After all, that’s what it means to ‘guarantee’ a home loan.

With some guarantor home loans, the guarantor doesn’t have to guarantee the whole loan amount. They may have the option to guarantee just 20% of your mortgage. That means that once you’ve repaid this portion of your loan, the guarantor is free from any more financial obligations.

Types of guarantor home loans

Guarantor home loans aren’t offered by all banks or lenders. While most lenders prefer the guarantor to be an immediate family member, some many offer different types of guarantor loans depending on the circumstances. Here are some of the different types of guarantor loans:

• Family or parent guarantee: this type of guarantor loan is generally designed for parents of the home buyer to act as guarantors. While most guarantors provide property as security for the loan, some lenders also accept a cash deposit as part of the loan security.
• Security guarantee: under a security guarantee, the guarantor provides their property as security for the home loan. If they have an existing mortgage on their home, the bank can take out a second mortgage as security.
• Security and income guarantee: this type of guarantee is often used when a parent is trying to help their child purchase a property as a student or with a low income. Like a security guarantee, this type of loan uses the property as security as well as the parent's income to demonstrate the buyer can afford to service the loan.
• Limited guarantee: as the name suggests, under this type of loan, the guarantor only guarantees a small portion of the loan. This helps to reduce the potential liability tied to their property. Once the buyer repays that portion of the loan, the guarantor is released and no longer liable for the home loan.

Please note, we do not participate in the Home Guarantee Scheme, Victorian Homebuyer Fund or other government home-buyer assistance schemes.

If you are eligible for the First Home Buyer Grant, these funds can't contribute to your 20% deposit. Please speak to your conveyancer on how best to approach this.

Home guarantee scheme

While a guarantor home loan can help you get into the property market sooner than you could by yourself, it’s not the only option. Introducing the Home Guarantee Scheme. Developed by the Australian government, this initiative is designed to help eligible home buyers buy a home.

The scheme includes three types of guarantees:

1. First Home Guarantee (FHBG): this supports eligible home buyers to buy a home sooner, with a deposit of as little as 5%.
2. Regional First Home Buyer Guarantee (RFHBG): this guarantee is intended to help eligible regional home buyers buy a home sooner, in a regional area, with a deposit of as little as 5%.
3. Family Home Guarantee (FHG): supporting eligible single parents and eligible single legal guardians of at least one dependent to buy a home sooner, with a deposit of as little as 2%.

There are limited positions available each year and these schemes are only available through participating lenders.

The First Home Guarantee

The First Home Guarantee (FHBG) is designed to help eligible home buyers to buy a home sooner. Under the FHBG, a portion of the buyer’s loan is guaranteed by Housing Australia, so an eligible home buyer can purchase a property with a deposit of as little as 5% without having to worry about paying LMI or LDP. Under the FHBG you may be able to access a guarantee of up to a maximum amount of 15% of the value of the property based on the lender’s assessment.

Regional First Home Buyer Guarantee

The Regional First Home Buyer Guarantee (RFHBG) aims to help eligible regional home buyers purchase a property in a regional area sooner. This scheme works in much the same way as the FHBG, it’s just on offer to regional buyers to purchase in regional areas.

The Family Home Guarantee

Introduced by the Australian government, this initiative is designed to help eligible single parents or eligible single legal guardians with at least one dependent child purchase a family home. Under the Family Home Guarantee, you can purchase a property with a deposit of as little as just 2% of the property’s value and avoid paying LMI or LDP. Housing Australia will then provide a guarantee to the lender that covers the remaining 18% of the property value.

Eligibility criteria apply, but you can use the eligibility tool to work out which guarantee you might qualify for. For more information, visit the Housing Australia website.

If you’re looking to learn more about purchasing a property without a 20% deposit, you can read our blog - Five things to consider if you don't have a 20% deposit.

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.