What is co-borrowing?
Understanding co-borrowing is an important part of making informed decisions when applying for a loan. Co-borrowing through Ubank means you apply for, and share a loan with, another person. You both take on equal responsibility for repaying this loan. While co-borrowing can help strengthen a loan application and make larger borrowing amounts possible, it’s essential to understand what it means to be a co-borrower – including the level of responsibility involved and whether you receive a meaningful benefit from the loan (known as a substantial benefit). By understanding how co-borrowing works, you can make confident, well-informed choices about your financial future.
Am I a co-borrower?
A co-borrower is someone who borrows money with you and is equally responsible for repaying the loan. When you apply for a loan together, we will use your combined income, expenses, assets and liabilities to assess whether you can repay the loan. You will also both share in the management of the loan. At Ubank, we will lend to new co-borrowers who are in a spousal or de facto relationship.
What is a substantial benefit?
As a guide, Ubank generally sees a substantial benefit as being at least 25% of the funds being used on or for you. This means that you would:
- own at least 25% of the asset(s) purchased or improved with the loan funds; or
- own at least 25% of the asset(s) funded by the loan being refinanced; or
- use 25% of the loan funds for other personal use, like going on a holiday or purchasing a car.
Will I receive a substantial benefit?
Determining whether you will receive a substantial benefit can be confusing at times. When trying to determine whether you will receive a substantial benefit, ask yourself questions like:
- Will my name appear on the property title of the property being purchased?
- Are some or all of the funds being used to pay off my credit card or personal loan?
- Am I going on a holiday with the funds being borrowed?
If you answered No to these questions, it is likely that you will not receive a substantial benefit. If you’re still unsure whether you will receive a substantial benefit, contact your banker or broker and they can assist you.
What if I don’t receive a substantial benefit?
If you don’t receive a substantial benefit but still want to be a co-borrower, we need to understand why you want to be a co-borrower and whether you understand the risks involved. There could be other borrowing structures available that may be better suited to your needs. It’s important that you obtain your own legal, financial and taxation advice before you decide to proceed with your loan application with us.
We will only proceed with the application if we are satisfied that you have entered into the loan without being pressured or coerced. If you feel like you are being pressured into entering the loan agreement, please let us or your broker know straightaway.
What are the financial risks of co-borrowing?
If you decide that being a co-borrower is right for you, it’s important you understand the risks that come with it (even if you don’t receive a substantial benefit):
- You will still be responsible for full repayment of the loan, even if your co-borrower does not contribute to the repayments.
- If the loan cannot be repaid, you may have to sell your assets to repay the debt.
- If repayments are not made, it may affect the credit rating of both co-borrowers.
What rights and protections will I have as a co-borrower?
The Banking Code of Practice sets out our commitments to you if you choose to proceed as a co-borrower. This is in addition to the rights and protections afforded to you under the National Consumer Credit Protection Act and National Credit Code.
Co-Borrower vs Guarantor
| Feature | Co-Borrower | Guarantor |
|---|---|---|
| Role in the loan | Applies for the loan together with another person | Supports someone else’s loan without being a borrower |
| Legal responsibility | Responsible for 100% of the loan jointly (together with the other co-borrower) and severally (individually) | Responsible to the extent of the guarantee if the borrower defaults |
| Ownership of property/asset | May have full, partial or no ownership of the secured property | Typically has no ownership of the property or asset |
| Access to loan funds | May directly receive or benefit from the loan funds | Does not receive, access or use loan funds |
| Substantial benefit | May or may not receive a benefit (depends on ownership or usage) | Does not receive a substantial benefit |
| Impact on borrowing capacity | Loan is included in their liabilities, and may affect future borrowing capacity | May still impact borrowing capacity, but usually less than a co-borrower |
| Credit file impact | Loan appears on their credit report | Guarantee may be recorded; defaults or enforcement action may adversely affect their credit profile |
| Security provided | May be tied to the purchased asset/property | Often provides additional security (e.g. their own property as guarantee) |
| Exit from arrangement | Must be refinanced or repaid or a formal release approved by the lender | Can be released under certain conditions, usually when the borrower can meet the lending requirements independently |
| Common scenario | Two people buying a home together | Parent guaranteeing a child home loan |
Some common examples
The examples below show some common situations about whether a co-borrower receives a substantial benefit. Names and figures are examples only. Every situation is different, so if you’re unsure, speak to your banker or broker and seek independent advice.
Example 1 – Buying a first home together
Scenario: Priya and Sam are married, and both work full-time on salaries – Priya as a registered nurse and Sam as a warehouse manager. After saving for three years, they have a $95,000 deposit and apply for a Ubank home loan of $665,000 to buy a $760,000 townhouse where they will both live. Both Priya and Sam will be listed on the certificate of title as equal (50/50) owners.
Substantial benefit: Yes. Sam will own half of the property they are buying so he clearly receives a substantial benefit.
Example 2 – Refinancing and paying off a partner’s debts
Scenario: Maria bought her home before she married Tom and is the sole owner on the title. The home is worth $640,000 with $200,000 still owing. Maria and Tom refinance to Ubank and roll in Tom’s debts at the same time – a $48,000 car loan and $24,000 across two credit cards ($72,000 in total). The new Ubank loan is $272,000, so about 26% of the funds are used to clear debts in Tom’s name.
Substantial benefit: Yes. Although Tom is not on the property title, roughly 26% of the loan funds are used to pay off debts owned by Tom, which is a direct financial benefit to him, despite not being on the property title.
Example 3 – Refinancing a home owned by one partner only
Scenario: Ben bought his home before he met his partner Chloe and is the sole owner on the title. Chloe and Ben live in the house along with their daughter. Ben refinances his $430,000 loan to Ubank for a lower rate. Chloe, who works full-time, is asked to come on as a co-borrower to strengthen the application. She would not be added to the title, would not receive any of the funds, and none of the loan would pay off any debts of hers.
Likely no substantial benefit: Even though Chloe will receive the incidental benefit of living in the home with Ben, she likely does not receive a substantial benefit as she gains no ownership of the property, will not receive any of the funds and none of her liabilities will be repaid using the loan. Chloe should think carefully about whether co-borrowing is right for her and seek independent advice.
