Family Guarantees for Property Loans in Australia: What Parents and Guarantors Need to Know

At Jaide Law, a boutique property law firm in Sydney specialising in conveyancing across NSW, QLD, and VIC, we regularly guide families through these arrangements. While our conveyancing services focus on properties in NSW, QLD, and VIC, we provide independent legal advice (ILA) to guarantors nationwide, including in WA, SA, NT, ACT, and TAS. This post explains how family guarantees work, the key risks involved, and why independent legal advice is non negotiable, especially when Self Managed Super Funds (SMSFs) enter the picture.

Understanding Personal Guarantees in Property Loans

A personal guarantee is a legal commitment where you agree to repay the loan (or a portion of it) if the main borrower defaults. In family scenarios, parents often guarantee a child’s home loan to help them secure better terms or avoid Lenders Mortgage Insurance (LMI) by effectively boosting the deposit through equity in the parents’ property.

Many lenders now offer structured family security or limited guarantee options, where liability is capped (for example, to a percentage of the loan or equity in the guarantor’s property), and release is possible once the loan to value ratio (LVR) drops below 80 percent. This reduces risk compared to unlimited guarantees, but the commitment remains significant.

Under Australian law, these guarantees are regulated by the National Consumer Credit Protection Act 2009 (Cth), with state specific rules applying during conveyancing and registration where relevant.

Why Families Choose Guarantees and When It Makes Sense

Australia’s property market, particularly in Sydney, Brisbane, and Melbourne, often requires substantial deposits. A family guarantee can:

• Increase borrowing capacity without needing a full 20 percent deposit.
• Help avoid LMI costs, which can add tens of thousands to the loan.
• Support first home buyers or investors entering the market sooner.

For SMSF borrowers, guarantees can facilitate Limited Recourse Borrowing Arrangements (LRBAs) under the Superannuation Industry (Supervision) Act 1993. For SMSF loans, it is important to ensure you are working with a broker and accountant experienced in SMSF property purchases.

It is a practical way to build generational wealth, but only when everyone understands the full implications.

Key Risks for Guarantors

While the intention is positive, the risks are real and can affect your financial security long term:

• Liability for repayment: If the borrower defaults, you are responsible for the guaranteed amount, plus interest, fees, and enforcement costs. In worst case scenarios, lenders can pursue your assets, including selling secured property.
• Credit impact: The guarantee appears on your credit report. Defaults affect your score, limiting future borrowing.
• Reduced borrowing capacity: Lenders factor in the contingent liability, which can restrict your own home loan or refinancing options.
• Family dynamics: Financial stress can strain relationships, something we have seen in practice when circumstances change unexpectedly.

Many lenders now limit guarantees to reduce these exposures, but thorough review is essential.

The Critical Role of Independent Legal Advice

Australian lenders almost always require guarantors to obtain independent legal advice (ILA) before signing. This involves consulting a separate lawyer (not the borrower’s or bank’s solicitor) who explains the documents, risks, and obligations in clear terms.

ILA provides:

• Confirmation you understand the commitment.
• Protection against claims of undue influence or misunderstanding.
• A solicitor’s certificate that lenders need to proceed.

For SMSF related guarantees, advice must also address superannuation compliance to prevent breaches.

At Jaide Law, our property lawyers deliver this advice efficiently nationwide, with transparent fees and a focus on your specific situation. 

Practical Steps Before Committing

From our experience helping families, some practical steps to consider include:

• Reviewing all loan and guarantee documents carefully.
• Considering limited guarantee options where available.
• Discussing exit strategies, such as when the guarantee can be released.
• Factoring in life changes, job loss, interest rate rises, or family events.
• Seeking both legal and financial advice early.

Final Thoughts: Protect Everyone Involved

Family guarantees can open doors in a competitive property market, but they demand careful planning and professional input. By prioritising independent advice, you protect relationships and finances alike.

If you are considering a guarantee, whether for a standard home loan or an SMSF structure, reach out to Jaide Law. As a trusted property law firm, we offer responsive, client focused support for conveyancing in NSW, QLD, and VIC, and independent legal advice across Australia. Contact us today for clear guidance tailored to your needs.

Disclaimer – We know most of you get this, but just to be clear, the information above is general and does not consider your unique situation. Please do not rely on it as a substitute for professional advice. We strongly encourage you to seek appropriate guidance for your specific needs.