Understanding co-borrowing
Co-borrowing can be a smart way to boost your borrowing power, but it’s important to understand how it works and what you’re signing up for, before taking on a loan with someone else. In a nutshell, a co-borrower is someone who applies for a home loan with you and shares equal responsibility for repaying it. Their income, credit score and financial details are considered alongside yours, which can help boost your chances of loan approval and impact how much you can borrow. Co-borrowers are typically spouses, family members, or even close friends and because both names go on the loan and property title, you’re both legally and financially responsible for the mortgage. If you’re buying your first home or need extra support to meet lender requirements, having a co-borrower can make a difference.
Each co-borrower will:
- be listed on the loan agreement as a borrower
- have equal responsibility for repaying the loan
- have an equal say in how the loan is managed.
Reasons for co-borrowing
Co-borrowing can be a practical and beneficial option for loan applicants. Let’s explore some of the most common reasons why people co-borrow.
Co-borrower vs guarantor
Co-borrowing isn’t the same as being a home loan guarantor and there are some important differences involved. Let’s do a quick comparison.
Co-borrower
- Each co-borrower is equally responsible for repaying the loan, whether together or individually. For example, if one borrower can't contribute to a repayment, the other borrower still has to cover it.
- If loan payments have been missed, co-borrowers can be asked together or separately to get repayments up to date.
- As a co-borrower, you must repay the whole loan if your co-borrower can’t.
- Co-borrowers can contact their lender together or individually for loan-related support.
- A co-borrower is entitled to all relevant information about the loan and their co-borrowers.
Guarantor
- A guarantor only becomes responsible for repaying a loan if the borrower hasn’t met their obligations.
- If loan payments have been missed, a lender will work to get repayments up to date from a borrower or co-borrower before asking a guarantor to step in.
- A guarantor legally agrees to step in if the borrower can’t repay the loan. This includes covering the portion of the loan the guarantor is liable to pay (guaranteed amount), plus any interest, fees and other costs outlined in the agreement.
- A guarantor is only entitled to information that’s relevant to the loan they’ve guaranteed.
Before becoming a co-borrower
Before you jump into a co-borrowing agreement, it’s important to know that you’re sure of your decision and are aware of any potential financial risks. If you’re unsure, it’s always a good idea to talk to a solicitor or financial advisor before making any decisions. Here’s a checklist of key questions to ask yourself before committing.
If you’re thinking of applying for a home loan with a co-borrower, it’s worth understanding how we’ll review your loan application to help inform your next steps.
Financial risks of co-borrowing
If you’ve decided to go ahead with co-borrowing, make sure you understand the terms of the loan agreement, the benefit you’re receiving under the loan, and your ability to make any repayments (or all repayments if required) before you sign any paperwork.
Remember:
- You’re responsible for the entire debt, even if your co-borrowers don’t contribute.
- If you’re not able to make repayments, you may need to sell your assets to repay your lender.
- If the loan isn’t repaid, it can impact the credit rating of all co-borrowers.
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