Preparing financially
Family guarantee loans: how they actually work
The mechanics of a limited guarantee, how it differs from co-ownership, when it's released, and the real risk to the guarantor's own home.
- A family guarantee uses a portion of a family member's property equity as security — they don't own the purchased property.
- Most guarantees are 'limited' — capped to a specific amount, not the entire loan.
- The guarantee is typically released once the loan reaches a set LVR threshold, not automatically.
- The guarantor's own property is genuinely at risk if you default and the shortfall isn't covered.
- If the guarantor is on the Age Pension, a payout after default (not the guarantee itself) is treated as a gift and can affect their pension.
How a limited guarantee actually works
A family guarantee (sometimes called a family pledge or security guarantee) lets a family member — commonly a parent — offer part of the equity in their own property as additional security for your loan, instead of, or alongside, a cash gift. Most lenders structure this as a limited guarantee — covering a specific amount or percentage, not the entire loan — so the guarantor's exposure is capped rather than open-ended.
How it differs from co-ownership
A guarantor is not an owner of the property and doesn't appear on its title — this is a different structure from the joint-ownership and co-ownership arrangements covered in the buying-with-family guide, and can be combined with, or used instead of, those structures depending on the family's situation and goals.
When the guarantee is released
The guarantee is commonly released once the loan balance falls below a set LVR threshold on the purchased property alone (often around 80%, though this varies by lender) — through a combination of repayments and, sometimes, property value growth — at which point the guarantor's property is no longer linked to your loan. Ask the lender directly what specific threshold and process applies.
The real risk to the guarantor
If you default and the shortfall isn't covered by the sale of your property, the lender can pursue the guaranteed portion of the guarantor's own property — potentially requiring them to sell or refinance their own home. This is a genuine financial risk to a specific person's home, not an abstraction, and every guarantor should obtain independent legal and financial advice (commonly required by the lender via a signed certificate) before agreeing.
If the guarantor receives the Age Pension or another Centrelink payment, agreeing to be a guarantor doesn't itself affect their pension — but if you later default and the guarantor has to actually pay out, that payment is treated as a gift to you and Centrelink's gifting rules apply, which can affect the guarantor's pension assets and income test. A pensioner guarantor should get specific advice on this before agreeing, not just general legal advice.
Practical checklist
Before entering a family guarantee arrangement
- Confirm the guarantee is limited, and to exactly what amount or percentage
- Ask the lender what LVR threshold releases the guarantee, and how that's monitored
- Ensure the guarantor obtains independent legal and financial advice before signing
- If the guarantor receives the Age Pension or other Centrelink payments, get specific advice on how a potential payout could affect their entitlement
- Discuss, as a family, what happens if repayments become difficult
Relevant Delora tool
Read the buying-with-family guide for co-ownership structures →
Questions for a professional
- Is this guarantee limited, and to what specific amount?
- What LVR threshold releases the guarantee, and how will we know when it's reached?
- What happens to the guarantor's property specifically if repayments are missed?