Limited vs Full Family Guarantee Home Loans: What Your Parents Actually Risk
If your parents are thinking about going guarantor, their first question is usually the same. How much of their home is really on the line?
The answer depends on how the guarantee is written. Most family guarantees are limited to a set amount, while a full guarantee can cover the whole loan. This article compares the two with real numbers.
General information only. This doesn’t consider your personal situation and isn’t credit, legal or financial advice. Lender policies change, so check current rules before relying on anything here.
If you’re new to the idea, start with our plain-English guide to guarantor home loans. Parents who want the wider picture should also read guarantor home loan risks for parents.
Family guarantee is the umbrella term
“Family guarantee”, “family pledge” and “guarantor loan” all describe the same basic idea. A family member offers equity in their property as extra security for your loan.
What changes the risk is the limit on that guarantee. There are two broad types:
- Limited guarantee. The guarantor’s liability is capped at a stated dollar amount, usually enough to bring your loan down to 80% of the property value.
- Full guarantee. The limit is set at the whole loan amount, so the guarantor can be pursued for the entire shortfall if things go wrong.
Banks that subscribe to the Banking Code of Practice must limit a guarantor’s liability to a specific amount or to the value of a specified property. That limit can still be the full loan, and it can carry interest and recovery costs on top.
Non-bank lenders aren’t bound by the Code, so read the limit clause in any guarantee closely. Full guarantees are far less common on residential home loans, and we rarely see a reason to use one when a capped guarantee does the job.
| Feature | Limited guarantee | Full guarantee |
|---|---|---|
| Liability limit | A stated dollar amount, usually the gap to 80% LVR plus any borrowed costs | The whole loan amount |
| Interest and recovery costs | Can be added on top of the limit | Can be added on top of the limit |
| Parents’ equity tied up | Only the guaranteed portion | Potentially much more of their home |
| Borrower’s property sold first | Yes, under the Banking Code | Yes, under the Banking Code |
| How common | The usual structure for home loans | Much less common |
How lenders set the cap on a limited guarantee
The starting point is simple. The guarantee covers the part of your loan above 80% of the lender’s valuation.
As a formula, that is your loan amount minus 80% of the property value. If you borrow some of your buying costs, the guarantee grows by that amount too.
Some lenders round up or add a small buffer. The final figure is written into the guarantee and the mortgage over your parents’ property, so ask to see it before anyone signs.
Worked example: a $700,000 purchase
Say you buy a $700,000 home with little deposit. Your savings cover stamp duty and other costs, and you borrow the full purchase price.
- Loan amount: $700,000
- 80% of the value: $560,000
- Limited guarantee: $140,000, secured against your parents’ home
- Full guarantee: up to $700,000
- Lenders mortgage insurance: none, because the combined security keeps the loan at 80%
The lenders mortgage insurance you avoid is real money. On one insurer’s published rates, a 95% loan on this home would attract around $29,000 in LMI including Victorian stamp duty on the premium.
Who gets pursued first if repayments stop
The guarantee is a backstop. Under the Banking Code, a bank enforces its security over your property before it turns to your parents’ mortgage.
The process usually runs like this:
- You fall behind and the lender issues a default notice, which must give at least 30 days to fix the problem.
- A bank bound by the Code sends your parents a copy of any default notice or formal demand within 14 days.
- If the default isn’t fixed, the lender takes possession and sells your property.
- Sale proceeds go towards the debt, interest and selling costs.
- Any remaining shortfall can be claimed from your parents, up to the limit in their guarantee.
That second step matters. It gives your parents time to step in, get advice or help you sell on your own terms before the lender does.
A falling market: where the two types split
This is where the difference shows up in dollars. Using the $700,000 loan above, and ignoring arrears, interest and selling costs for simplicity:
- Sells for $630,000. The shortfall is $70,000. Under either guarantee your parents could be asked for $70,000.
- Sells for $560,000. The shortfall is $140,000. Both guarantees could be called for the full $140,000.
- Sells for $490,000. The shortfall is $210,000. A limited guarantee stops at $140,000, while a full guarantee could see your parents asked for all $210,000.
In the third case, you would still owe the other $70,000 yourself. The cap limits your parents’ exposure without wiping the rest of the debt.
In real life the numbers run higher. Arrears, default interest and selling costs add to the debt, and many guarantees allow interest and recovery costs on top of the stated limit.
The lender can’t sell at any price
A lender selling a repossessed home must still look after the price. Queensland law, for example, requires it to take reasonable care to sell at market value.
In Victoria, the Court of Appeal has said a lender must take reasonable steps to get the best price consistent with enforcing its security. Proper advertising and a reasonable marketing period are part of that.
If a lender falls short, the borrower or guarantor may have a claim. It’s a protection worth knowing about, though it is no substitute for acting early.
How each type of guarantee ends
A limited guarantee is usually released once your loan is at or below 80% of the property’s current value. You get there through repayments, extra repayments, price growth or a mix of all three.
Release isn’t automatic. You apply to the lender, it usually orders a fresh valuation and then decides.
A full guarantee can take longer to shake off because it covers more of the debt. Ask the lender at the start what release conditions apply to the guarantee you’re offered.
The parents’ risks article covers how to plan the release from day one. It also explains how a live guarantee can affect your parents’ own borrowing power.
Is a guarantee the right tool?
Sometimes a guarantee isn’t needed at all. The federal 5% Deposit Scheme lets eligible buyers purchase with a 5% deposit and no LMI, with the government guaranteeing up to 15% of the value.
Since 1 October 2025 the scheme has no income caps or place limits. Property price caps still apply, and in Victoria they are $950,000 in Melbourne and Geelong and $650,000 elsewhere. Check current rules at firsthomebuyers.gov.au.
A family guarantee can still make sense if you have very little saved, the property is above the scheme cap or you don’t meet the scheme’s criteria. Some families prefer a written family loan agreement instead, and the right choice depends on everyone’s circumstances.
What your parents should confirm before signing
- Whether the guarantee is limited, and the exact dollar limit in the documents
- Whether interest and recovery costs can be added on top of that limit
- Whether the lender follows the Banking Code of Practice
- What they must do, and what valuation is needed, to be released
- That they have had independent legal advice, which lenders generally require
If you’d like the numbers worked out for your own purchase, we can map the guarantee amount and a likely release point before anyone signs.
Frequently asked questions
Is a family guarantee the same as a limited guarantee?
Not quite. “Family guarantee” is the general term, and a limited guarantee is one type of it. Most family guarantees on home loans are limited, but the documents decide, so check the stated limit.
Can the bank take my parents’ whole house?
Under a limited guarantee, the lender can only recover up to the stated limit plus any interest and costs the guarantee allows. It could still force a sale of their home if they can’t pay that amount another way.
Are my parents liable for more than the guarantee limit?
The principal they guarantee is capped, but many guarantees let the lender add interest and recovery costs on top. Their lawyer can confirm exactly what the documents allow.
Can a limited guarantee be reduced over time?
The usual path is full release once your loan reaches 80% of the property’s value. Whether a lender will reduce the limit part way through is a policy question, so ask before choosing a lender.
Do non-bank lenders offer the same protections?
Not necessarily. The Banking Code only binds banks that subscribe to it, so non-bank lenders may use different guarantee terms. Ask which rules apply before signing.
About The Author
Known to most as “Pato”, Andrew Paterson is an award-winning, Licensed Mortgage Broker with over 15 years’ experience in finance and real estate. He works with first home buyers, refinancers and upgraders, making the process clear, calm and practical.
He’s been a finalist for Best Regional Broker, Best Finance Broker and Thought Leader at the Better Business Awards. A lifelong learner and advocate for the industry, he speaks at national events and represents Aussiewide on the world stage internationally.
