Family Loan Agreements and What to Check Before Signing

A family loan agreement is a written document that sets out the terms of a financial loan from one family member to another, most commonly used when parents or relatives contribute funds toward a property deposit or purchase.

Many buyers who can access family support assume a casual arrangement is enough. Lenders require formal documentation, and without it, your loan application may be delayed or declined entirely. The agreement needs to specify whether the funds are a gift or a loan, the repayment terms if applicable, and whether the family member holds any security over the property. Each of these elements affects how the lender assesses your borrowing capacity and whether you'll qualify for the loan amount you need.

The Difference Between a Gift and a Loan in Lender Terms

A gift is a payment with no obligation to repay. A loan requires repayment on agreed terms and is treated as an ongoing liability.

If your parents provide $50,000 toward your deposit, the lender will ask whether it's a gift or a loan. If it's a loan, they'll include the monthly repayment amount in your debt commitments when calculating your serviceability. A $50,000 loan repayable over five years at current variable rates adds roughly $900 to your monthly obligations, which reduces the amount you can borrow by around $150,000 depending on your income and other debts. If the same amount is documented as a gift with a statutory declaration from the donor, it has no impact on your borrowing capacity and can be used in full toward your deposit. The lender will still require proof that the funds have been genuinely transferred and are not subject to any undisclosed repayment terms.

Documentation Lenders Will Ask For

Lenders need to see a written agreement or statutory declaration that confirms the nature of the funds.

For a gift, most lenders accept a statutory declaration signed by the person providing the money, stating that the funds are a genuine gift with no expectation of repayment and no claim over the property. For a loan, the lender requires a formal loan agreement that sets out the loan amount, interest rate (which may be zero), repayment schedule, and whether the lender holds any security. If the family member holds a registered mortgage over the property, the bank will factor that into the loan-to-value ratio calculation and may adjust the amount they're willing to lend. Some lenders will also ask for bank statements showing the transfer of funds and proof that the donor has the financial capacity to make the gift or loan without causing hardship. Without this documentation, the application will stall at the assessment stage.

How a Family Loan Agreement Affects Your Application

The structure of the agreement determines whether you're classified as having genuine savings and whether the funds are treated as a liability.

Consider a buyer applying for an owner occupied home loan with a 10% deposit made up entirely of gifted funds from a parent. If the gift is properly documented, the lender will accept it as part of the deposit and assess the loan on that basis. If the same buyer presents those funds as a loan from a family member without a written agreement, the lender may either decline the application or require evidence that the monthly repayment has been factored into the serviceability assessment. In some cases, lenders treat undocumented family loans as contingent liabilities and apply a notional repayment amount even if no formal repayment schedule exists. The buyer ends up with a lower borrowing capacity than they would have had if the agreement was documented from the outset.

Registered Mortgages and Second Security Positions

If the family member wants security over the property, they can register a second mortgage, but this has significant implications for the primary lender.

Under APS 112, lenders can only treat the exposure as a standard residential mortgage if they hold unequivocal enforcement rights, including a right to possession and power of sale. A second registered mortgage from a family member dilutes those rights. The primary lender may increase the interest rate, reduce the maximum loan amount, or decline the application entirely. If the family loan is unsecured, the primary lender's position is unaffected, but the family member has no recourse beyond a personal claim if the borrower defaults. Most buyers and their families are unaware of this until they're already in the application process. Structuring the family contribution as a gift or an unsecured loan removes this complication entirely.

Interest Rates and Tax Implications for the Family Lender

A family loan can be interest-bearing or interest-free, but the tax treatment differs depending on the structure.

If a parent lends money at an interest rate and charges their child repayments, the interest income is assessable and must be declared in the parent's tax return. If the loan is interest-free, there's no income to declare, but the ATO may treat the arrangement as a private loan and scrutinise whether it's genuine or a way to structure a gift for duty or tax purposes. From the borrower's perspective, interest paid on a family loan for an owner-occupied property is not tax deductible. If the property is an investment property, the interest may be deductible, but the loan agreement must be documented and the interest actually paid, not just accrued. A verbal agreement won't satisfy the ATO if the deduction is ever reviewed.

Statutory Declarations and Why They're Not Always Enough

A statutory declaration is sufficient for a gift but does not replace a loan agreement if repayment is expected.

Some families try to document a loan using only a statutory declaration that says the funds are provided for the purpose of purchasing a property. That's not enough. The declaration doesn't set out repayment terms, interest, or whether the funds are secured, and the lender will treat it as incomplete documentation. If the donor later expects repayment and the borrower cannot meet the obligation, there's no enforceable contract. A proper loan agreement, drafted with legal input if the amount is significant, protects both parties and gives the lender the clarity they need to assess the application. The cost of preparing the document is minimal compared to the cost of a delayed settlement or a declined home loan application.

What Happens If the Family Lender Wants Repayment Later

If funds are initially documented as a gift and the family member later seeks repayment, it creates a legal and financial problem.

The borrower may be unable to refinance or sell without the family member's consent if they've informally registered an interest in the property. The primary lender may consider the new liability a breach of the original loan terms if it affects the borrower's capacity to service the mortgage. If the original loan was obtained using a statutory declaration that said the funds were a gift, and it turns out they were always intended as a loan, the borrower may have made a false declaration, which is a serious issue both legally and with the lender. The solution is to document the arrangement correctly from the beginning, even if it feels awkward to formalise a family transaction.

Family Loan Agreements and First Home Buyer Schemes

Gifted funds and family loans can both be used with the Australian Government 5% Deposit Scheme and Help to Buy, but the way they're documented affects eligibility.

Under the 5% Deposit Scheme, the borrower must contribute at least 5% of the property value as a deposit. Gifted funds can form part or all of that deposit, provided they're documented as a genuine gift. If the funds are a loan, the monthly repayment reduces the borrower's serviceability, which may affect whether they can afford the home loan repayments on the property they want to purchase. Help to Buy requires a minimum 2% deposit from the borrower's own funds, and some participating lenders define that as funds the borrower has saved or received as a gift, not funds they've borrowed. The distinction is critical if the buyer is relying on a government guarantee to avoid LMI. Incorrect documentation can result in the application being rejected after weeks of processing.

If you're considering a family contribution toward a property purchase, the structure of the agreement matters as much as the amount. Call one of our team or book an appointment at a time that works for you to discuss how to document the arrangement properly and structure your application for approval.

Frequently Asked Questions