How to Use a Family Pledge to Secure Your Home Loan Without a Deposit

Buying a home is a major milestone, but saving for a deposit can be a significant barrier, especially for first-time buyers. In Australia, a family pledge (also known as a guarantor home loan) offers a way to enter the property market without a cash deposit. This arrangement allows a family member, usually a parent, to use their own property as security for your loan, eliminating the need for a traditional 20% deposit. In this comprehensive guide, we’ll explain how a family pledge works, who is eligible, the risks involved, and how to set one up.

What Is a Family Pledge Home Loan?

A family pledge home loan is a mortgage where a close relative (the guarantor) offers their property as additional security for the borrower’s loan. This allows the borrower to purchase a home with little to no deposit, while also avoiding Lenders Mortgage Insurance (LMI). The guarantor’s property serves as a safety net for the lender, reducing their risk.

For example, if you want to buy a $600,000 property, a standard loan would require a $120,000 deposit (20%) to avoid LMI. With a family pledge, your parents could use the equity in their home (say, $120,000) as security. You could then borrow the full $600,000, plus costs, without any cash deposit.

Key Features of a Family Pledge

• No deposit required: Borrow up to 100% of the property value, and sometimes more to cover stamp duty and fees.
• No LMI: Since the loan is effectively secured by two properties, lenders often waive LMI, saving thousands of dollars.
• Guarantor’s property as security: The guarantor’s home is used as collateral, but only for a limited portion of the loan, not the entire amount.
• Release of guarantee: Once you’ve built enough equity or paid down the loan, the guarantor can be released from the obligation.

How Does a Family Pledge Work?

A family pledge involves three parties: the borrower, the guarantor, and the lender. Here’s a step-by-step breakdown:

1. Application: The borrower applies for a home loan and nominates a guarantor. Both parties must meet the lender’s criteria.
2. Valuation: The lender assesses the value of both the property being purchased and the guarantor’s property.
3. Loan structure: The loan is split into two portions:
   • The main loan: Secured by the purchased property.
   • The guaranteed portion: Secured by the guarantor’s property, typically covering the deposit gap (e.g., 20% of the purchase price).
4. Settlement: The loan is settled, and the borrower takes ownership of the new home.
5. Repayment: The borrower makes regular repayments. Over time, as the loan balance decreases and property values rise, the guaranteed portion may be released.
6. Release of guarantee: Once the loan-to-value ratio (LVR) on the purchased property reaches a certain threshold (usually 80%), the guarantor can apply to be released from the obligation.

Example Structure

This structure means the guarantor is only liable for the $120,000 portion, not the entire loan. If the borrower defaults, the lender can recover the guaranteed amount from the guarantor’s property.

Who Can Be a Guarantor?

Lenders have strict rules about who can act as a guarantor. Typically, the guarantor must be:

• A close family member: Most lenders only accept parents, and sometimes siblings, grandparents, or adult children. Spouses are usually not allowed because they are already considered co-borrowers.
• A homeowner with sufficient equity: The guarantor must own a property (usually their primary residence) with enough equity to cover the guaranteed amount. Equity is the difference between the property’s value and any outstanding mortgage.
• Financially stable: Guarantors must demonstrate they can service the guaranteed portion if the borrower defaults. This includes having a stable income and a good credit history.
• Under a certain age: Some lenders impose age limits (e.g., under 65 or 70) to ensure the guarantor can manage the obligation.
• Receiving independent legal advice: Lenders require guarantors to get legal advice before signing, to ensure they understand the risks.

Can a Guarantor Have an Existing Mortgage?

Yes, a guarantor can have a mortgage on their property, as long as there is sufficient equity. For instance, if a parent’s home is worth $800,000 and they owe $300,000, their usable equity is $500,000. They could potentially guarantee up to that amount, though lenders typically cap the guarantee at a percentage of the property value.

Benefits of a Family Pledge for First-Time Buyers

For first-time buyers, a family pledge can be a game-changer. Here are the main advantages:

• Enter the market sooner: Instead of waiting years to save a deposit, you can buy now and start building equity.
• Avoid LMI: LMI can cost tens of thousands of dollars. For a $600,000 loan with a 5% deposit, LMI could be over $20,000. A family pledge eliminates this cost.
• Potentially better interest rates: Some lenders offer competitive rates for guarantor loans, similar to standard loans with a 20% deposit.
• Access to government incentives: You may still qualify for first home buyer grants or stamp duty concessions, depending on your state.
• No need for a cash gift: Unlike a gifted deposit, a family pledge doesn’t require the guarantor to hand over cash. Their property simply acts as security.

Risks and Considerations for Guarantors

While a family pledge can benefit the borrower, it’s crucial for guarantors to understand the risks:

• Loss of property: If the borrower defaults and the lender cannot recover the debt from the main property, the guarantor’s home could be sold to cover the guaranteed portion.
• Impact on borrowing capacity: By acting as a guarantor, the individual’s own borrowing ability may be reduced, as lenders consider the contingent liability.
• Strain on relationships: Financial arrangements between family members can lead to tension if things go wrong.
• Limited control: The guarantor has no say in how the borrower manages the loan but bears the consequences of default.

How to Mitigate Risks

• Set a clear agreement: Draft a family loan agreement outlining expectations, repayment plans, and what happens in case of default.
• Limit the guarantee: Ensure the guarantee is for a specific amount, not the entire loan.
• Monitor the loan: Stay informed about the borrower’s financial situation and the loan status.
• Plan for release: Aim to release the guarantee as soon as the LVR allows, typically within 2–5 years.

Steps to Set Up a Family Pledge Home Loan

Setting up a family pledge involves several stages. Here’s a practical guide:

1. Assess Your Financial Situation

Both borrower and guarantor should review their finances. The borrower needs to demonstrate the ability to repay the loan, while the guarantor must have sufficient equity and income.

2. Research Lenders and Loan Products

Not all lenders offer family pledge loans, and terms vary. Compare interest rates, fees, and features like offset accounts. Some lenders specialize in guarantor loans for first-time buyers.

3. Get a Property Valuation

The lender will require a valuation of both properties. This determines the maximum guarantee amount.

4. Seek Legal and Financial Advice

Guarantors must obtain independent legal advice. Both parties may also benefit from financial counseling to understand the long-term implications.

5. Apply for the Loan

Submit a joint application with all required documents, including proof of income, identification, and property details.

6. Loan Approval and Settlement

Once approved, the loan is settled. The borrower takes ownership of the new property, and the guarantee is registered on the guarantor’s title.

7. Monitor and Release

Regularly review the loan. When the LVR on the purchased property drops below 80% (or the lender’s threshold), apply to release the guarantee. This usually requires a new valuation.

Comparison: Family Pledge vs. Other Low-Deposit Options

Data as of 2025. FHLDS details from the National Housing Finance and Investment Corporation (NHFIC).

Frequently Asked Questions (FAQ)

Can a family pledge be used for an investment property?

Most lenders restrict family pledge loans to owner-occupied properties. Investment loans are riskier, and lenders may not accept a guarantor for them. However, some lenders may consider it on a case-by-case basis.

How long does the guarantee last?

The guarantee remains until the borrower applies for a release and the lender approves it. This typically takes 2–5 years, depending on property value growth and loan repayments. There is no automatic release; you must request it.

What happens if the guarantor wants to sell their property?

If the guarantor sells their home, the guarantee must be settled first. This could mean paying out the guaranteed portion from the sale proceeds. Alternatively, the borrower might refinance to remove the guarantee before the sale.

Is a family pledge the same as a co-borrower arrangement?

No. A co-borrower is jointly liable for the entire loan and appears on the title. A guarantor is only liable for a specific portion and does not own the property.

Can I use a family pledge if I have bad credit?

It’s possible, but more difficult. Lenders assess the borrower’s credit history. A guarantor with strong finances can help, but a poor credit score may still lead to rejection or higher interest rates.

Conclusion

A family pledge home loan can be a powerful tool for first-time buyers struggling to save a deposit. By leveraging a family member’s equity, you can enter the property market sooner, avoid LMI, and potentially secure a better financial future. However, it’s essential to weigh the risks, especially for the guarantor, and to approach the arrangement with clear communication and professional advice. If you’re considering this option, consult with a mortgage broker or lender to explore your eligibility and find the best product for your needs.


References

1. Australian Securities and Investments Commission (ASIC) – “Guarantor loans” (2024). https://moneysmart.gov.au/guarantor-loans
2. National Housing Finance and Investment Corporation (NHFIC) – “First Home Loan Deposit Scheme” (2025). https://www.nhfic.gov.au/what-we-do/fhlds
3. Australian Banking Association – “Family pledge loans explained” (2023). https://www.ausbanking.org.au/family-pledge-loans
4. Mortgage Choice – “How do guarantor home loans work?” (2025). https://www.mortgagechoice.com.au/guides/guarantor-home-loans
5. Finder – “Family guarantee home loans” (2024). https://www.finder.com.au/family-guarantee-home-loans