"I only helped my child qualify for the housing loan. Why am I liable for the whole debt?"

A young couple applies for financing to purchase their first home.

Their income is insufficient to obtain the amount required. The bank suggests that one of their parents join the application as a co-borrower.

The parent agrees.

The couple will live in the property and pay every monthly instalment. The parent regards his involvement as a temporary favour to help them qualify for financing.

Several years later, the couple encounters financial difficulties. The instalments fall into arrears and the bank demands payment from the parent.

He is surprised.

“I did not receive the loan money. I do not own the house. Why is the bank asking me to pay?”

The answer depends on the financing documents he signed.

A person described as a co-borrower may assume substantially greater liability than someone who merely provides income information or supports an application.

1. A co-borrower is not merely a reference for the loan

When two or more people sign a facility as borrowers, each of them may become contractually responsible for the secured obligations.

Depending on the wording of the documents, their liability may be joint, several, or joint and several.

This may allow the bank to demand payment from one borrower without first dividing the outstanding amount according to who used the property or who had promised to pay the instalments.

The parent cannot necessarily limit his liability by saying:-

• he did not receive the purchase money;

• he never lived in the property;

• the monthly instalments were supposed to be paid by his child;

• his name does not appear on the title; or

• the family privately agreed that he would not be responsible.

Those facts may be relevant between the family members. They do not necessarily alter the contract with the bank.

2. Borrowing money and owning the property are different matters

The borrowers named in the financing documents are not always identical to the registered proprietors of the property.

A parent may be included as a co-borrower because his income strengthens the application, while the property is registered only in the child’s name.

Conversely, several people may own a property even though the financing structure assigns different obligations to each of them.

Before signing, the parties should identify separately:-

• who will own the property;

• who will be named as borrower;

• who will provide the deposit;

• who will pay the monthly instalments;

• whose income is being relied upon;

• who will provide a guarantee, if any; and

• what happens if one person stops paying.

A person should not assume that the absence of his name from the title also removes his liability under the financing documents.

3. A co-borrower is different from a guarantor

A guarantor undertakes obligations under a guarantee. A co-borrower is a principal party to the loan or financing itself.

The distinction may affect:-

• when the bank may make a demand;

• what must occur before liability arises;

• the amount that may be claimed;

• available contractual rights and defences; and

• the process required to obtain a release.

The label used in a family discussion is not decisive.

Someone may say, “I am only guaranteeing the loan,” when the document actually identifies that person as a borrower. The signed facility and security documents must be examined.

4. The family’s private arrangement does not automatically bind the bank

The parent and child may agree that the child will bear every payment and indemnify the parent against any claim.

That agreement may create rights between them. However, the bank is not automatically bound by an arrangement to which it did not agree.

If the child defaults, the parent may still need to respond to the bank’s demand before pursuing any separate right against the child.

The practical value of an indemnity also depends on whether the child has sufficient assets or income to reimburse the parent.

A private promise is therefore not a substitute for understanding the bank documents.

5. Can the parent remove his name after a few years?

Not unilaterally.

The borrowers cannot normally remove one party merely by signing a family agreement or notifying the bank that the remaining borrower will take over the loan.

The bank may require:-

• a fresh credit assessment;

• evidence that the remaining borrower can service the facility;

• refinancing with a new facility;

• revised security documents;

• a transfer of the property;

• payment of legal, valuation or administrative costs; or

• settlement of existing arrears.

Until the bank issues an effective written release, the outgoing party may remain liable.

A verbal statement that the bank will “consider removing the name later” should not be treated as a release.

6. What if the borrowers divorce or separate?

A divorce settlement may state that one spouse will retain the property and continue paying the housing loan.

That arrangement does not, by itself, rewrite the financing agreement.

If both spouses remain named as borrowers, the bank may continue to regard both as liable until it approves a restructuring, refinancing or release.

This creates several risks.

The departing spouse may no longer control the property but may remain exposed to missed instalments. The continuing liability may also affect that spouse’s ability to obtain new financing.

Any separation arrangement involving financed property should therefore address:-

• the proposed transfer of ownership;

• the outstanding financing;

• the bank’s consent;

• the deadline for refinancing;

• responsibility for instalments pending completion;

• responsibility for legal and banking costs; and

• what happens if the refinancing application fails.

7. What happens if one borrower dies?

Death does not automatically settle the facility.

The effect depends on the financing documents, ownership structure, estate administration and any mortgage-reducing insurance or takaful coverage.

Questions may arise as to:-

• whether the policy or certificate covers the deceased borrower;

• the amount payable under the coverage;

• whether exclusions apply;

• who must continue servicing the instalments;

• whether the surviving borrower can retain the property; and

• whether the deceased’s estate remains liable.

The surviving family should notify the bank and insurer or takaful operator promptly. They should not assume that the entire outstanding balance will automatically be paid.

8. Before becoming a co-borrower, ask the difficult questions

A prospective co-borrower should understand:-

• the maximum amount for which he may be liable;

• whether liability is joint and several;

• the interest, profit and default charges applicable;

• whether the property is sufficient to settle the debt;

• whether the bank may claim a shortfall after enforcement;

• the insurance or takaful coverage obtained;

• how the arrangement will affect future borrowing capacity;

• whether a release is possible; and

• what protection exists if the person using the property stops paying.

Copies of the signed Letter of Offer, facility agreement, charge, assignment, guarantee and insurance or takaful documents should be retained.

Do not sign on the assumption that the documents are merely administrative forms required to assist a family member.

Helping someone qualify for a loan may be a generous decision.

It may also create a long-term legal obligation extending far beyond the family’s original understanding.