Parents acting as guarantors for their children's Home loans

Parents who have the means are often keen to help their children get into their first home. One option is by acting as a guarantor where the parents use some of the equity in their home to help the child to purchase their own property. While this works well for many families it is important for parents to understand the risks so they don't end up getting into a financial difficulty themselves.
It is important for parents to think through what it might mean to them if the borrower defaults. The lender will ask the guarantor to pick up the repayments or pay out the loan. Financial counsellors see parents that are not prepared to deal with that when it happens. 

Some alternatives to consider:
Give a gift. The advantage of this is it does not tie the parents up in any ongoing contractual arrangement or obligation. The disadvantage is if the homebuyers separate, the gift becomes part of the joint property of the relationship, with both parties claiming their share.

Lend money. A loan will give the parents greater security than a gift but not expose them to the risks of a guarantee.

Buy the property yourself. The parents buy the property, let their children live in the property either rent-free or charging rent. If the parents charge rent they will be liable for tax on the rental income but will be able to claim tax deductions for interest costs and maintenance. This option gives the parents full protection over their asset but has the drawback of not giving the child the opportunity to own their own property.

Buy the property together. This option allows the parents to use the equity in their home as security and share the ongoing cost of the mortgage. The disadvantage here is if the child stops making payments the parents will be in much the same position as if they were guarantors - they will be liable for the full amount.

It is vital that you seek independant legal and financial advice before entering into such a guarantor arrangement. You don't want to turn a financial difficulty into a family breakdown.