Guarantor Home Loans: Using Your Parents' Equity to Buy

How it works

A lender wants 20% equity behind a home loan. With a guarantee, part of that security comes from your parents' property. No cash changes hands. The lender takes a mortgage over your new home and a second, limited mortgage over theirs.

The usual structure is two loans. On an $800,000 purchase where you have $40,000 saved:

• Loan one: $640,000, which is 80% of the price, secured against your home.
• Loan two: $120,000, secured against your parents' home and guaranteed by them.
• Your $40,000 covers the rest.

You make the repayments on both. Your parents pay nothing unless you stop paying.

Keep the guarantee limited

This is the most important design choice. A limited guarantee caps your parents' exposure at a stated amount, in the example $120,000 plus interest and costs. An unlimited or 'all obligations' guarantee makes them liable for everything you owe that lender, now and later. Always ask for limited, and ask to have the limit written into the guarantee.

What lenders need

• You must afford both loans on your own income. The guarantee solves a deposit problem, not an income problem.
• Your parents need enough equity. If they still have a mortgage, their lender's position matters, and it's simplest when both loans are with one lender.
• They must get independent legal advice from a different lawyer to yours. Lenders insist, and so should you.
• Guarantors who are retired may be asked how they'd cope if the guarantee were called on.

The risks, plainly

If you can't pay and the sale of your home doesn't clear the debt, the lender can pursue your parents for the guaranteed amount, and ultimately their house. The guarantee also ties up their equity, which can limit their own borrowing or downsizing plans.

Then there's the family side. Siblings may see it as favouritism. A relationship may end. Decide in advance what happens in each case, and put it in writing. We've seen guarantees work beautifully and we've seen them strain families. The difference is nearly always whether everyone understood the deal at the start.

Getting the guarantee released

The aim is to release it within a few years. That happens when your loan falls to 80% of your home's value, through repayments, a rise in value, or both. Put the guaranteed portion in its own loan split and pay it down first.

Release isn't automatic. You apply, the lender reassesses, and the mortgage over your parents' home is discharged.

This article explains how New Zealand lenders generally assess these situations. It is general information, not personalised financial advice, and lender policy changes often — check your own position with a registered adviser. Official sources: Reserve Bank of New Zealand for lending policy and the OCR, and Sorted.org.nz for independent government-backed money guidance.