Committing to be a guarantor is a significant choice as it will affect you and the family you're helping with a guarantor home loan. We'll walk you through what to anticipate so you can navigate this process confidently. Seeking independent legal and financial advice is always helpful when determining if becoming a guarantor is appropriate for your situation.
Read our guide to guarantors for borrowers if you're considering asking a family member to be a guarantor for you.
What is a guarantor?
A guarantor commits to stepping in and settling a loan if a borrower is unable (or unwilling) to make their payments. By offering this commitment – known as a guarantee – a guarantor assists a borrower in securing credit and getting their loan approved.
Is being a guarantor the same as being a co-borrower?
No, a co-borrower is an individual who borrows funds alongside someone else, with each co-borrower agreeing to repay the amount owed either jointly or individually.
A guarantor only becomes liable for repaying the lender if the borrower hasn't fulfilled their obligations and the lender requests the guarantor to intervene and repay what the borrower owes under the guaranteed loan.
How do you become a guarantor?
First, a lender will examine your financial and credit history to determine if you're suitable. Then you’ll receive information about the loan you're guaranteeing. You officially become a guarantor when you sign a guarantee, which is a legal document outlining the commitments you make to the lender as a guarantor.
Individuals who serve as guarantors may also benefit from additional protections and rights under these codes:
- The Banking Code of Practice which applies when the guarantee supports a borrower who is an individual or a small business.
- The National Credit Code where the guarantee supports a borrower receiving credit that's primarily for personal, domestic or household purposes, or for purchasing or improving residential property. Learn more on the Australian Securities and Investments Commission website at asic.gov.au.
What's the maximum you might need to pay under a guarantee?
The guarantee will specify the maximum amount you might need to pay, which could be:
- a fixed amount or all amounts owed under the loan you're guaranteeing, plus interest, costs and other amounts described in the guarantee, or
- an amount equal to the value of any property or other assets you've provided the lender as security (for example, a mortgage on your home or a term deposit), plus interest, costs and other amounts described in the guarantee.
The maximum amount you must pay under the guarantee won't change (unless you agree in writing), even if:
- The guarantee includes an indemnity. This is an additional promise you make to pay the lender for any losses the lender incurs relating to the guarantee. The indemnity will be detailed in the guarantee.
- The guarantee covers modifications to the loan and the lender lends the borrower additional money later.
What happens if the borrower misses their repayments?
If a borrower cannot meet their payment obligations and restore their repayments, the lender may need to take formal actions, such as issuing a notice requiring them to pay what's due. If they cannot fulfill our request, the entire amount owed under the loan will become due.
If the borrower still cannot repay the lender, the lender may ask you to step in – meaning you'll be responsible for the repayment. If you cannot repay the lender, there may be serious consequences for you.
Your broker and lender will always collaborate with you to find alternative options, but it's crucial to understand what could happen.
- If you've offered security as part of your guarantee: You may need to sell your home or assets to meet your obligations. For instance, if you've given the lender a mortgage over your home as security, you may need to sell your home to repay the lender, or the lender could intervene to sell it. If money is still owed after the sale, you'll need to repay the remaining amount, unless the guarantee states otherwise.
- Even if you don't provide any security for your guarantee: The lender may still need to pursue legal action against you, which could mean you still risk losing your home.
Consider the financial risks
It's important to remember that becoming a guarantor could mean: ⚠️ You may need to repay the lender what the borrower owes them ⚠️ You may need to sell your property to repay them ⚠️ It may impact your ability to borrow funds
So before becoming a guarantor, ensure you understand the terms of the guarantee and loan you're guaranteeing, as well as your capacity to make any repayments if required.
Before you sign the guarantee
Privacy and consent
The first thing your lender will do is verify your identity and ask if you accept their Privacy Policy. Here are some important points to know:
How will the lender use your personal information? Any personal information you provide may be used to help the lender assess your creditworthiness. This may include personal information you've recently provided to assess you as a borrower or guarantor.
Will the lender share your personal information with the borrower? If your income will help the borrower make loan repayments and/or cover other expenses, some basic details about your financial position will be shared with the borrower during the loan application assessment.
What information will you receive from the lender? Before the lender accepts a signed guarantee from you, you’ll receive information about the borrower's financial position and the loan you'll be guaranteeing, which may influence your decision to give the guarantee.
This may include:
- A copy of the proposed guarantee
- The Letter of Offer or loan to be secured by the guarantee
- The terms and conditions, fees and charges that apply to the loan
- A list of any related security contracts, such as mortgages
- A credit report from a credit reporting agency (the lender may not provide this if the guarantee is for business lending)
- Any financial accounts or statements of financial position provided by the borrower over the last two years to support the loan application
- Information about whether we've given the borrower any notice of demand in the last two years
- The latest account statement for the guaranteed loan where we've given a notice of demand in the last two years
- Information about whether any existing loan we've given the borrower will be cancelled if the guarantee isn't provided
- Any current credit-related insurance contract the lender has
- Other information requested by you about the guaranteed loan, however the lender doesn’t need to provide our internal opinions (for example, our credit assessments). If the National Credit Code applies to the loan you're guaranteeing, you can request a copy of our assessment about whether the loan is suitable for the borrower.
How to make a good decision
Before you sign the guarantee, you’ll discuss with your broker and lender what becoming a guarantor entails. It's important that you have this conversation without the borrower or anyone representing the borrower present.
Take some time to consider it
Remember, becoming a guarantor is optional – it's your decision. Before you commit:
- Use our checklist to ask yourself key questions
- Consult a solicitor
- Consult your accountant or financial advisor
Checklist of key questions to ask yourself
□ Why am I giving the guarantee?
□ Will the borrower be able to repay the loan independently?
□ Does the borrower have contingency plans if their circumstances change and they can't repay the loan?
□ Am I prepared to repay the loan if the borrower doesn't?
□ Can I afford to repay the loan if the borrower doesn't?
□ Is my lender relying on my income to repay the loan?
□ How will I benefit from providing the guarantee (and any supporting security) to the lender?
□ Will it affect my ability to borrow now or in the future? □ What would I do if my home was sold to repay the loan?
Signing the guarantee
When can the lender accept your signed guarantee?
We want to ensure you've had sufficient time to consider before you commit. Your signed guarantee will only be accepted if you've had a few days to review the information provided. However, lenders will often accept you as a guarantor earlier in situations such as:
- You receive independent legal advice about the guarantee.
- You're acting in different capacities. For example, you're providing the guarantee as a sole director or director of a corporate borrower, or you're signing as both borrower and guarantor – but you're signing as trustee in one of those roles.
You also have options if you wish to withdraw, limit or end your obligations under the guarantee, which we explain below.
During the guarantee
You’ll be informed if the borrower's financial position deteriorates
The lender will only share information with you that relates to your guaranteed obligations. Here's what the lender can tell you:
✓ How much the borrower owes under the loan and if payments are overdue.
✓ If the borrower has informed us they're experiencing financial hardship which has resulted in a change to the guaranteed loan.
✓ If we send a formal demand or default notice to the borrower. You’ll also be notified if the borrower continues to be in default.
Here's what we can't tell you:
✗ Information about the borrower's other loans with us, even if those other loans are in arrears.
You can seek assistance
If you experience financial hardship, we want to help you find an appropriate solution. The assistance each lender may offer can differ for a borrower compared to a guarantor. For instance, a guarantor can't apply for assistance that alters the terms of the borrower's loan, but your lender can explore options once you explain the type of difficulty you're experiencing.
For more information about how each lender can help and how to apply, search for your lender and “hardship”.
Changing or ending your obligations under the guarantee
Your obligations as a guarantor are ongoing obligations – this means they'll remain effective until the loan is repaid or the guarantee is no longer required by us.
Withdrawing from the guarantee
You can notify us in writing if you want to withdraw from the guarantee. A lender may accept your withdrawal provided:
- they haven't provided any funds to the borrower under the guaranteed loan, or
- the loan agreement with the borrower significantly differs from the one you received before you signed the guarantee. This is unlikely to occur, as you should always receive an exact copy of the loan agreement, but it's important to be aware of this right.
Limiting your obligations
At any time, you can write to your lender and request to limit or further limit the maximum amount you must pay under the guarantee. Your lender may decline your limit request if:
- the limit you're requesting doesn't cover what the borrower owes the lender,
- our lender needs to make additional credit advances to the borrower, or
- Your lender wouldn't be able to adequately protect the current value of an asset that secures the guaranteed loan without making additional advances.
Ending your obligations as a guarantor
At any time, you can terminate your financial obligations under the guarantee by:
- paying us any money the borrower owes at that time, including any additional amounts we're already committed to provide to the borrower but haven't yet provided,
- paying us the maximum amount you're required to under the guarantee (if that amount is less), or
- proposing an alternative arrangement that we agree to.
Alternatives to Guarantor home loans
There are many alternatives to guarantor home loans that may better suit your financial situation. Get in touch so that we can take you through alternatives such as low-deposit home loans, government schemes and grants.
