Loan Tip: How to Remove a Parental Guarantee

Often when someone is buying their first property, they will use a parental guarantee to either avoid LMI and/or avoid paying a deposit at all. The way this works is that the parent’s property will be used as security for the loan, in addition to the property being purchased.

This introduces some risk to the parent as the parents’ property can potentially be taken if the loan is not paid.

So when there is enough equity the mortgage over the parents’ house should be discharged.

Example

Bart is going to buy a $100,000 property and he has only $2,000 in savings. He convinces his parents to use their property as security.

The bank takes a mortgage over Bart’s property and the Parents property and lends Bart $100,000.

Over the next 12 months Bart gets the loan down to $90,000 and the value increases to $120,000.

80% of $120,000 is $96,000 so Bart’s loan is less than 80% LVR and therefore the parent’s property could be removed as security.


To remove a property as security it is possible to ask the bank to release or discharge the mortgage. They will do a valuation on the remaining property – Bart’s house in the above example and if the less is less than 80% LVR they can release the security. Once the mortgage is discharged the parents will no longer be liable to the bank for Bart’s debt – but this is subject to the terms of the contract they entered into.

An easier and safer approach would be to refinance to a new lender who will pay out to old lender and completely remove the parent’s obligations.