A family guarantee can bring a first home forward by years. Your parents sign it, carry part of the risk, and own none of the property.
The buyer usually makes the first call. The parents need their own clear picture, so this is written for both sides of the table.
How A Family Guarantee Works
Most lenders want a 20% deposit before lending on standard terms. Below that, the Reserve Bank’s limits restrict low deposit lending, and what is available usually carries a low equity margin or fee.
A guarantee fills the gap with security instead of cash. Your parents offer part of the equity in their home, and the lender can assess your loan as if the deposit were closer to 20%.
Say you are buying a $900,000 townhouse in Albany with $90,000 saved. At 80%, a lender could lend up to $720,000 against the townhouse alone, leaving a $90,000 gap on an $810,000 loan. Security over your parents’ home for roughly that amount can close it, although lenders calculate the figure differently.
What the guarantee does not change is your income. You still need to service the full $810,000 at the lender’s test rate, and debt-to-income limits still apply. No guarantee will stretch an income that cannot carry the loan.
Limited Or Unlimited Is The First Question To Ask
A limited guarantee caps what your parents can be asked to pay at a set amount, plus interest and costs. In the example above, that is around $90,000.
An unlimited guarantee has no cap. Depending on the wording, it can cover the whole loan and any other debt you hold with that lender. If the buyer later signs a personal guarantee for their own business borrowing with the same bank, the parents can end up standing behind that too.
Wherever the lender allows it, I structure these as limited guarantees matched to the gap.
What Parents Are Signing
Parents, this part is for you. In most cases, you are agreeing to:
- A mortgage registered over your home in favour of your child’s lender, which stays until the lender agrees to release it.
- Pay the capped amount if repayments stop and cannot be put right. Your home is the security behind that promise.
- An affordability check on you. Lenders need to be satisfied you could meet the guarantee without substantial hardship, so they look at your income and outgoings as well as your equity. Retired parents with a freehold home can find this harder than they expect.
- Less room to borrow yourselves, because most lenders will count the guarantee when you next apply.
That last one is easy to underestimate. The mortgage can sit on your title for several years, so if you plan to downsize, renovate or buy a rental in that time, map out your own borrowing as an existing home owner or rental investor before you sign. If your home is held in a family trust, the trustees usually all sign, and the trust deed has to allow it.
Your Own Lawyer, Separate From Your Child’s
Lenders generally require guarantors to take independent legal advice, which means your own lawyer, separate from the one acting on the purchase.
Ask them whether the guarantee is limited, exactly what it covers, how it gets released, and what happens if your child’s relationship ends. A separation does not release a guarantee on its own.
The legal questions sit with your lawyer. I work alongside them on the lending side.
The Cover That Protects The Guarantors
In my experience, repayments rarely stop because a buyer gets careless. They stop because someone is injured, falls ill or loses their job.
That is why I raise personal life insurance and income protection with the buyer at the same time as the guarantee. Insuring the buyer’s income is one of the simplest ways to protect the parents’ home.
Getting The Guarantee Released
A guarantee is meant to be temporary, and it does not come off by itself. Once the loan drops to around 80% of the property’s value, through repayments, value growth or both, the buyer can apply for a release. The lender will usually want a current valuation and will reassess the buyer’s income and repayment history.
I like to set a target release date at the outset and check progress at every rollover. Holding repayments steady when rates ease can bring that date forward, and it fits naturally into a mortgage review, refix or refinance.
Reading Australian Advice? Some Of It Won’t Apply Here
Much of what comes up online is Australian. Those articles often talk about using a guarantee to avoid lenders’ mortgage insurance, and Australia’s Family Home Guarantee is a government scheme for single parents. Neither applies in New Zealand, where the Reserve Bank’s LVR limits and each lender’s own policy set the terms.
Other Ways Family Can Help
Parents can gift part of the deposit, which lenders usually want confirmed in writing with a gift certificate.
Some families prefer to own together. I have helped with multigenerational purchases where buying a home together as a family suited everyone better, because the parents wanted a share of the property for the risk they were taking.
Comparing these routes is a core part of the first home buyer mortgage advice I give, and the right answer often depends as much on the parents’ plans as the buyer’s.
Talk It Through Before Anyone Signs
Family guarantees work well when everyone understands them before the documents arrive, and when there is already a plan for getting them released.
If your family is weighing up a guarantee, get in touch and we can look at the numbers for both households before anyone commits.
Until next time,
Oliver