Rising interest rates and high property prices have prompted suggestions that first-home buyers could increase their buying power by asking their parents to go guarantor on a loan.

However, people need to ensure they are fully informed before agreeing to be a guarantor, the Chief Executive of the Banking Code Compliance Committee (BCCC), Prue Monument, said today.

“Ensuring you are clear about what you are signing up for, in agreeing to guarantee a loan, is essential because of the large financial risks involved,” Ms Monument said.

“It’s also important that people don’t feel pressured into going guarantor. In the worst cases, this can amount to financial exploitation, or what’s known as elder financial abuse.”

The BCCC monitors banks’ compliance with the Banking Code of Practice, which includes obligations to ensure customers make fully informed decisions before agreeing to be a guarantor. As subscribers to the Code, banks promise to meet these obligations.

The Code’s section on loan guarantees says, among other things, that banks must tell potential guarantors

  • there are financial risks involved in guaranteeing a loan
  • you should seek independent legal and financial advice
  • you can refuse to sign the guarantee
  • you can ask the bank for information about a loan you guarantee
  • it’s possible the guarantee may cover future credit and variations of the loan, within the limits set

The BCCC conducted an enquiry into the loan guarantee practices of banks in 2021. It raised concerns in its final report about failures by banks to consistently provide full disclosure of key information to guarantors.

The committee is now conducting a follow-up enquiry to check that banks have improved their practices since that report.

In particular, it is asking people to complete a short survey to hear about experiences in considering or providing a loan guarantee.

“The Banking Code obligations are a crucial safeguard to ensure guarantors understand the risks involved when providing a guarantee,” Ms Monument said.

“This follow-up inquiry will identify good practice for other banks to follow as well as highlighting areas that might need more focus and attention.”

The 2021 report said about $500 billion of credit was being supported by guarantees.

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