Difference Between Guarantors and Co-borrowers

There are so many different ways to break into the property market! Knowing your options can help you identify which pathway best aligns with your goals, needs, and financial situation. 

By understanding the difference between guarantors and co-borrowers, you can make choices about the way you approach buying your home. This can set you up for long-term financial success as you begin to pay back your loan.  

What’s a guarantor? What’s a co-borrower? What should you be aware of before choosing whose support to rely on? Here are our answers to these all-important questions. 

What is a guarantor?

A guarantor is a signatory on your loan with secondary responsibility for the amount you have borrowed.

Though a guarantor doesn’t have an ownership stake in your property, they do have financial liability. If you default on your loan repayments, your lender can pursue the guarantor to pay back the debt. 

In this arrangement, a guarantor may agree to guarantee anywhere between 20% and 100% of the loan value in the event of default. 

Having a guarantor can be a good option if you know you can afford to make regular loan repayments but don’t have enough deposit to take out the loan you need on your own. A guarantor can also help increase your borrowing power if you have poor credit history.

What is a co-borrower?

A co-borrower is a direct borrower on your loan. This person has equal responsibility to repay the full loan amount over the course of a pre-determined loan period. 

Your co-borrower has the same rights as you do over your property. Your income will be considered alongside that of your co-borrower, and your lender can pursue either you or the co-borrower in the event that one of you defaults. 

In a co-borrowing arrangement, future financing may be affected by your debt-to-income ratio. This is only a problem if your debts as high, as it may be more difficult to secure a new loan.

Co-borrowing can be beneficial to both parties. However, it’s important to ensure that you have trust in the person you’re borrowing with and that you have a plan if things change in your relationship or either or your financial capacities. 

The key differences

While both a guarantor and a co-borrower involve adding someone else to your loan process, there are a number of differences between these scenarios.

A guarantor is not responsible for making regular loan repayments and does not have rights to the property purchased with the loan. A co-borrower is financially responsible for repayments and has rights to the property. 

In the event of default, a guarantor will be responsible for paying either a fixed amount or all outstanding debt, depending on the guarantee signed. A co-borrower is responsible for paying back the loan in full to the same extent as all other borrowers on the same contract. 

Which pathway is right for you?

Assess your options closely to determine which pathway is right for you and your situation. Do your research, and understand the implications of various borrowing options and relationships. 

If you’re feeling unsure about what to do to support your property purchase, you don’t have to make the decision alone. Speak to an experienced broker who can guide you through the pros and cons. 

Ready to start exploring your borrowing options? You’ve come to the right place! Our Top 10 is where you can find best mortgage broker Melbourne has to offer.