Buying a new home can be an exciting process – and a stressful one! Particularly if you’re saving for a home deposit, watching climbing property values can be difficult to swallow as you work to increase the size of your deposit. However, there may be another way to get into the market sooner: bringing a guarantor onto your loan.

There are a number of options available to applicants who don’t have a substantial deposit in their pocket to buy a home. One of these options is known as a family pledge, which has two categories: service guarantees and security guarantees.

Service guarantees are not as common as they used to be.The more popular option is a security guarantee,which is often used by borrowers who have a limited deposit. In this situation, a relative or a friend can use the availableequity in their own home to guarantee the deposit of the borrower.

In this example, the client wants to buy a property for $600,000, they have enough money to cover the stamp duty and other costs, but they do not have enough for a deposit.  Their parents have a property with enough equity in it to assist.  The client takes out a loan 80% of the value, ie $480,000 using the purchase property as security, in their own name.  The remaining balance of $120,000 is then guaranteed by Mum and Dad with their property as additional security.  This is known as a limited guarantee as the parents’ guarantee is limited to only 20% of the loan instead of 100%.  The total mortgage held by the borrower is $600,000.

This is an excellent way for parents to be able to help their children get onto the property ladder.  They are not expected to make any repayments as it is still the requirement of the children / the borrower to service and repay 100% of the debt.