For partners, parents and friends asked to go on someone else's loan, as a borrower or a guarantor.
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A co-borrower is a party to the loan and owes all of it from the first day, whether or not they own the property. A guarantor promises to pay only if the borrower doesn't, usually up to a set limit, and has extra protections under the Banking Code of Practice about information, timing and enforcement.
A co-borrower signs the loan contract as a borrower. Co-borrowers are usually jointly and severally liable, so the lender can ask any one of you for every repayment and for the whole balance, whatever you have agreed between yourselves. The loan is your debt. It is reported on your credit file, and other lenders will count it when you apply for credit of your own.
A guarantor makes a separate promise to the lender: if the borrower doesn't pay, you will. Your liability only arises on the borrower's default, and under the Banking Code of Practice a guarantee to a bank must be limited, either to an amount or to the value of a particular property. A guarantee is often backed by a mortgage over the guarantor's own home.
Banks that follow the Code also give guarantors protections a co-borrower doesn't get. You receive information about the borrower's loan before you sign, the bank can't accept your guarantee until the third day after giving you that information unless you've had independent legal advice, you can withdraw before the loan money is first provided, and the bank must usually enforce the borrower's security before yours. Our guide to what happens to a guarantor if the borrower defaults has the detail.
Not necessarily, in either role. That is the risk for a co-borrower. You can owe the whole loan for a property you don't own. The Banking Code deals with this directly. If you will not receive a substantial benefit from the loan, a bank bound by the Code won't approve you as a co-borrower unless it has:
A substantial benefit includes getting a reasonably proportionate share of the property bought with the loan, or having a reasonable part of the loan used to pay your own debts.
Guarantors usually don't own the property they are supporting. That is expected, and it's why their liability is limited.
Lenders usually require anyone whose income is being used to approve the loan to be a borrower, and anyone who will be on the title to sign the loan and mortgage. If a lender asks you to be a co-borrower when you won't own any of the property or use any of the money, ask why, and whether a limited guarantee would do instead.
Leaving is hard in both roles. Under the Banking Code, a co-borrower can end their liability by written request only before credit has been provided or relied on, or for future advances where the bank can stop further lending. Otherwise the loan has to be refinanced into the other borrower's name, or the property sold.
A guarantor can withdraw before the loan money is first provided, or later if the loan the borrower signed differs in a material way from the one you were shown. After that, you can ask the bank to lower your limit, pay out the lower of the debt and your limit, or be released when the loan is refinanced. Our guarantor's exit roadmap sets out the options. Separating couples face both problems at once, which we cover in joint guarantees after separation.
Lenders commonly require guarantors to get independent legal advice and a solicitor's certificate before the guarantee is accepted. Many also ask for it from a co-borrower who gets no benefit from the loan. We advise both, at our Melbourne CBD office. Read what the solicitor explains before you sign to see what the appointment covers.
Get independent advice before you sign. Appointments at our Melbourne CBD office, standard or same day.