Helping Your Children Buy a Home with a Family Pledge Loan (Security Guarantee)

Family Pledge Loans are a powerful way for parents to help their children enter the property market without parting with cash or co-buying the home. By leveraging equity in an existing property, families can avoid the hurdles of saving a 20% deposit and paying costly LMI.

As property prices continue to rise across Australia, the dream of home ownership has become increasingly difficult for many first home buyers. For young Australians, saving the required deposit—often 20% of the property’s value—is a significant hurdle. Parents looking to support their children often explore various ways to help, and one increasingly popular strategy is the Family Pledge Loan, also known as a Security Guarantee.

This article explains how Family Pledge Loans work, their benefits, risks, and how families can structure this financial support responsibly.

What is a Family Pledge Loan: How can it help your children buy a home?

A Family Pledge Loan is a type of home loan where parents (or close family members) use the equity in their own home as additional security to support a child’s home loan. This enables the child to borrow up to 100% of the property value without needing to save a full deposit or pay Lenders Mortgage Insurance (LMI).

Instead of gifting cash or becoming a co-borrower, the parents offer a limited guarantee secured against their own property. The lender treats this security as if the borrower had a full deposit, thereby improving the loan-to-value ratio (LVR).

How It Works – An Example

Let’s say Emma wants to buy her first home for $600,000, but she only has $30,000 saved (5% of the purchase price). She would normally require a 20% deposit (i.e. $120,000) to avoid LMI.

Emma’s parents agree to offer a family security guarantee using the equity in their home. They pledge $90,000 (the shortfall between her deposit and the 20% threshold), secured against their own home.

This allows Emma to borrow the full purchase price, avoid LMI, and potentially secure a better interest rate—without her parents having to gift any cash or refinance their own home.

Key Features of Family Pledge Loans

1. No Cash Outlay RequiredParents are not providing cash; they’re offering a guarantee backed by the equity in their property.

2. Avoid Paying Lenders Mortgage Insurance (LMI)LMI can cost tens of thousands of dollars. A pledge loan can eliminate this cost by bringing the effective LVR below 80%.

3. Limited GuaranteeGuarantees are typically limited to a percentage (e.g., 20%) of the loan amount, rather than the full amount, to reduce parents’ exposure.

4. Option to Release the Guarantee LaterOnce the borrower has built sufficient equity—usually after a few years—the parents’ guarantee can be released, removing their ongoing risk.

5. Supports First Home BuyersMany lenders allow family pledge loans for first home buyers only, although some also allow them for second-time buyers with insufficient deposit.

   
   

Who Can Be a Guarantor?

While policies vary between lenders, most restrict security guarantors to:

• Parents or step-parents

• Grandparents (in some cases)

• Siblings (less common)

• Legal guardians

The guarantor must generally be an Australian citizen or permanent resident, and must demonstrate financial stability and sufficient equity in their own property.

Eligibility Requirements for Borrowers

To access a family pledge loan, the borrower must:

• Qualify for a standard home loan based on income, expenses, and credit history

• Demonstrate ability to repay the full loan on their own

• Usually provide at least 5% of the purchase price in genuine savings (although this varies)

• Purchase an owner-occupied property (investment properties may not be eligible)

  
  

Risks for Guarantors

While Family Pledge Loans offer a powerful way to support children, they also carry risks:

1. Exposure to Loan Default

If the borrower defaults on the loan, the lender may pursue the guarantor for the guaranteed portion, potentially leading to legal action or even forced sale of the guarantor's property.

2. Impact on Borrowing Capacity

Offering a guarantee may affect the guarantor’s ability to borrow in future. Lenders will factor the guarantee into any credit assessments, even though the guarantor isn’t making repayments.

3. Financial Strain in Changing Circumstances

Changes such as job loss, illness, divorce, or death (in either party) can add complexity or strain to the arrangement.

4. Family Tension

Money and family don’t always mix well. If expectations or outcomes aren’t clearly communicated, disputes can arise—especially if financial hardship or delays occur.

Risk Management and Responsible Structuring

Before entering a Family Pledge arrangement, it’s essential to take steps that protect everyone involved:

1. Seek Independent Legal and Financial Advice

Lenders require guarantors to get independent legal advice. It’s also wise to obtain financial advice to fully understand the implications.

2. Limit the Guarantee

Rather than guaranteeing the full loan amount, parents should consider limiting the guarantee to 20% of the property value. This significantly reduces their risk exposure.

3. Consider Loan Insurance

Some families opt to take out insurance (e.g., income protection or mortgage protection insurance) to safeguard the borrower’s ability to repay the loan.

4. Have a Family Agreement

While not legally binding, a written family agreement outlining responsibilities, expectations, and contingencies can help avoid misunderstandings.

Releasing the Guarantee

The guarantor’s property doesn't remain tied to the loan indefinitely. The guarantee can typically be released once:

• The loan balance is less than 80% of the property’s value, due to capital growth or principal repayments

• The borrower refinances or pays off part of the loan

• The lender agrees that sufficient equity has been built

A formal revaluation of the property is usually required, and borrowers may incur a small fee.

Tax and Estate Planning Considerations

While a guarantee isn’t a financial gift, it can have estate planning implications:

• Impact on Estate Distribution: If a guarantor passes away while the guarantee is still in place, their estate may be exposed if the borrower defaults.

• Gifting vs. Guaranteeing: Some parents consider gifting a deposit outright to avoid these complications, although this can raise issues of fairness between siblings or Centrelink eligibility.

Consulting a lawyer or estate planner can help ensure the arrangement fits within broader family goals and succession plans.

What Happens If the Relationship Breaks Down?

If the borrower separates from a partner, or the family relationship breaks down, complications can arise—especially if both parties were relying on the family pledge. The guarantee remains unless formally released, regardless of family changes.

To avoid issues:

• Consider buying property as tenants in common (if relevant)

• Have a clear plan and legal advice in place before proceeding

• Review arrangements regularly, especially after major life events

  
  

Case Study: How a Family Pledge Helped Sophie Buy Her First Home

Sophie, a 28-year-old marketing executive in Brisbane, had been saving for years but was still well short of the $120,000 needed for a 20% deposit on a $600,000 home. She had saved $40,000, which would usually mean paying around $13,000 in LMI.

Her parents, who owned their home outright, agreed to pledge $80,000 of equity in their property.

With this support, Sophie was able to:

• Buy her home sooner

• Avoid paying LMI

• Qualify for a competitive interest rate

Three years later, after the property appreciated in value and Sophie made regular repayments, the loan balance had reduced to 78% of the home’s new value. Her parents' guarantee was formally released, with no financial impact on them.

Role of a Mortgage Broker

Navigating Family Pledge Loans can be complex. A mortgage broker can:

• Explain lender-specific policies (as rules vary significantly)

• Help structure the guarantee safely and responsibly

• Identify lenders that allow limited guarantees or release after shorter periods

• Coordinate with legal and financial advisors

A good broker ensures both the borrower and the guarantor understand their obligations and options, and supports the process from application to loan settlement and beyond.

Final Thoughts

Family Pledge Loans are a powerful way for parents to help their children enter the property market without parting with cash or co-buying the home. By leveraging equity in an existing property, families can avoid the hurdles of saving a 20% deposit and paying costly LMI.

However, these arrangements are not without risk. They should be entered into with caution, clear communication, and professional advice. When structured correctly, a Family Pledge Loan can make home ownership possible years earlier—and help secure a strong financial future for the next generation.

Need help navigating Family Pledge Loans?Speak to an experienced mortgage broker today to understand your options and find a lender who supports your goals—safely, responsibly, and with your family’s financial security in mind.