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You are a co-borrower if you sign a loan with someone else.

In most instances both you and the other co-borrower are jointly and individually liable for the debt. If the person you borrow the money with is unable to pay their share of the loan, you will be responsible for repaying the full amount outstanding.  Both borrowers have equal legal responsibility to repay the full amount of the loan, and the income of the co-borrower may be taken into account when the loan application is opened.  As co-borrower, you have entitlements over any property or assets purchased with the borrowed money.

The main difference between a co-borrower and a loan guarantor is that the co-borrower is always liable for the payment of the loan whether the principal borrower pays back or not. Although the principal borrower always undertakes to pay back the entire debt, the co-borrower bears an identical financial and legal responsibility as if they had taken the loan themselves.  If the principal borrower cannot pay at all or starts to default, the lender can request for full payment from the co-borrower. However, a guarantor, is not liable until the principal borrower defaults and the lender has taken all necessary steps to collect the payment. To get the guarantor to pay back the loan, the lender would have to prove that the principal borrower has defaulted.

Moreover, the guarantor is permitted to recover from the defaulting borrower, all the money that has been paid to the lender. But the co-borrower may only recover from the borrower half of the debt they paid to the lender. In addition, a guarantor may be released from the initial contract of guarantee before the loan term ends. Usually, after the borrower has built up some equity in a piece of real estate (approximately 30 percent), the guarantor may be released from the terms of the contract of guarantee. A co-borrower does not enjoy this privilege.

If re-payments aren’t made on time, the default will affect your credit score.  Even if the person you have co-signed for does fully pay the loan, taking out a loan as a co-borrower can affect your ability to get finance in the future.  This is because a lender will consider your debt to income ratio. If your debts, including those you hold as co-borrower, are high, this could affect your ability to obtain finance.   If you are asked to be a co-borrower on a loan, one key question that you should consider is whether you stand to benefit from the loan.

You should always seek independent legal advice before signing a loan contract as a co-borrower.

A guarantor is the person who provides the additional security for a home loan and agrees to be responsible for repaying a debt owed to the lender under a loan provided to another individual or business if the borrower (or borrowers) cannot make their repayments. Most lenders prefer the guarantor to be a close relative – usually a parent, grandparent or siblings. Some lenders will allow extended family members and even ex-spouses to be a guarantor for a loan. This varies depending on the lender.

Your guarantor doesn’t need to provide any cash payment. No money changes hands with a guarantee. However, they will have to accept the obligations associated with entering into a guarantee. And you will still need to make the repayments. The guarantor agrees to offer part of their home equity to top up your cash deposit. In this way, a guarantor home loan can let first home buyers buy a place of their own far sooner. The extra security a guarantor provides means the home buyers may be able to secure a home loan with a small deposit – or no deposit at all. It could also mean avoiding Lenders Mortgage Insurance – a saving that can run into thousands of dollars.

The lender will still check that you can comfortably manage the loan repayments, but having a guarantor can fast-track you into a place of your own.

A family security guarantee is a serious commitment for both you and the guarantor. If your loan was approved but a change in circumstances meant you couldn’t meet your repayments, the lender has the right to sell the property to recover the loan. If the sale price doesn’t cover the outstanding loan amount, the lender has the legal right to seek the limited guarantee amount from your guarantor. In a worst case scenario where your guarantor was unable to pay, the lender has the right to sell the guarantor’s property to recover the guarantee amount.

It’s easy to imagine how a scenario like this could create family tensions. So it is important that you and your guarantor carefully consider whether a guarantee arrangement would be suitable.

It’s very important that both you and your guarantor understand all of the conditions and obligations of a family guarantee before signing. For this reason, it is essential that guarantors seek legal advice before entering into any guarantee agreement.

A guarantor is the person who provides the additional security for a home loan and agrees to be responsible for repaying a debt owed to the lender under a loan provided to another individual or business if the borrower (or borrowers) cannot make their repayments.    Most lenders prefer the guarantor to be a close relative – usually a parent, grandparent or siblings.  Some lenders will allow extended family members and even ex-spouses to be a guarantor for a loan. This varies depending on the lender. 

A guarantor doesn’t need to provide any cash payment. No money changes hands with a guarantee.  Instead, the guarantor agrees to offer part of their home equity to top up the Mortgagee’s cash deposit. In this way, a guarantor home loan can let first home buyers buy a place of their own far sooner.

When you sign your name as a guarantor, you are legally responsible for paying back the entire loan if the other person cannot or will not make the repayments. You will also have to pay any fees, charges and interest.  If you choose to provide a guarantee, you will be signing a legal contract in which you agree to repay the loan if the borrower cannot meet the repayment terms and conditions of their loan contract.  If the borrower is unable to repay their loan, the lender will first seek to recover the debt from any security they hold from the borrower before they look to any security you have provided in support of your guarantee (unless they expect that after doing so, a substantial amount would still be owing).  In the event you don’t pay, the lender may enforce their legal rights, which could involve selling any security you have offered under your guarantee.  This involves significant financial risk for you and could result in your losing your home if you offer it as a security.

As a guarantor you don’t have the right to own the property or items bought with the loan.

The guarantee may cover all or specific loans that the lender gives the borrower, depending on the type of guarantee. The guarantee will set out the maximum amount you may have to pay, which can be:

1. the amount of any dollar limit described in the guarantee plus other things covered by the guarantee, such as interest, expenses and recovery costs
2. a specific category of amounts, such as the amount owing under a specified loan, or
3. the value of a specified property or other assets under a specified mortgage or other security at the time of recovery.

By signing the guarantee you’re making a very serious commitment which involves significant financial risk. Remember, you don’t have to become a guarantor (while the loan may not be provided without the guarantee, you need to be sure before you commit to becoming a guarantor).

A family security guarantee is a serious commitment for both the mortgagee and the guarantor.   If a loan was approved but a change in circumstances meant the mortgagee couldn’t meet their repayments, the lender has the right to sell the property to recover the loan. If the sale price doesn’t cover the outstanding loan amount, the lender has the legal right to seek the limited guarantee amount from the guarantor. 

It’s easy to imagine how a scenario like this could create family tensions. So it is important that you carefully consider whether a guarantee arrangement would be suitable.

It’s very important that both you understand all of the conditions and obligations of a family guarantee before signing. For this reason, it is essential that guarantors seek legal advice before entering into any guarantee agreement.