Do you know how a Family Loan Agreement works?

A family loan puts your deposit in writing

A family loan agreement is a legally binding document that records when a family member lends you money for a house deposit. The lender reviews it to confirm the funds are a genuine loan, not a hidden gift, and that your repayment obligations won't put your mortgage at risk.

Along coastal Adelaide, where median property prices sit comfortably below the capital city caps for government schemes, families often step in to help buyers reach the 10% or 20% deposit mark without waiting years to save the full amount. The difference between a text message promising help and a signed agreement with repayment terms is the difference between an approval and a decline.

Why lenders care about family loans

Lenders assess every dollar leaving your account each month to determine what you can afford to repay. A family loan with scheduled repayments reduces your borrowing capacity because it's treated as an ongoing debt. A gift, on the other hand, has no repayment obligation and doesn't affect your serviceability.

Without a formal agreement, most lenders will assume the funds are a gift and require a signed statutory declaration from the family member confirming they have no expectation of repayment. If you intend to repay the amount over time, that declaration would be false, and submitting it can void your home loan application or create legal issues down the track. The agreement keeps everyone honest and protects the family relationship if circumstances change.

What the agreement needs to include

The document must name the lender and borrower, state the loan amount, outline the repayment schedule, specify the interest rate (including zero percent if that's the arrangement), and include signatures from both parties with a date. Some lenders also require the agreement to be witnessed by a solicitor or justice of the peace, particularly if the loan amount is above $50,000.

If your family member is charging interest, that rate should reflect what a reasonable lender would charge, not a token amount. If they're not charging interest, state that explicitly. Vague terms like "pay it back when you can" won't satisfy a credit assessor.

How repayments affect your borrowing capacity

Consider a buyer who borrows $40,000 from a parent to reach a 15% deposit on a property near Henley Beach. If the agreement specifies repayments of $500 per month over seven years, the lender will reduce the buyer's maximum loan amount to account for that $500 leaving their income each month. On a variable rate owner occupied home loan at current pricing, that reduction might be around $90,000 to $100,000 in borrowing capacity, depending on the lender's serviceability calculator.

If the family loan has no fixed repayment schedule, some lenders will calculate a notional repayment based on the outstanding balance, which can be even more restrictive. That's why buyers sometimes structure the agreement with repayments starting after settlement or after an initial interest-only period on the mortgage, giving them breathing room in the early months.

Family guarantees versus family loans

A family guarantee is a different structure. Instead of lending you cash, a family member uses the equity in their own home as security for part of your loan. You make all the repayments, but the guarantor is legally responsible if you default. The guarantor's property is listed as additional security on your mortgage until you've built enough equity to release them, usually once your loan-to-value ratio drops below 80%.

A family loan, by contrast, is a separate debt. The family member gives you the funds outright, and you repay them according to the agreement. Your mortgage lender has no claim over the family member's property, and the family member has no claim over yours unless the loan agreement itself is secured by a caveat, which is rare in parent-to-child arrangements.

For first home buyers in Adelaide's coastal suburbs, a family loan can be the faster option when parents have cash savings but don't want their own property tied up in their child's mortgage for several years. A guarantee makes more sense when the parents have equity but limited liquid funds.

Interest and tax implications

If your family member charges interest on the loan, that interest is assessable income for them and must be declared on their tax return. If they charge no interest or an interest rate below what the ATO considers market rate, the loan may be subject to Division 7A rules if the lender is a private company, or fringe benefits tax if the lender is your employer. Those scenarios are less common in straightforward parent-to-child lending, but they're worth mentioning to a tax advisor if the family member involved runs a business through a company structure.

You, as the borrower, generally can't claim a tax deduction for interest paid on a family loan used to purchase your home, just as you can't claim interest on your mortgage for an owner-occupied property. If you're buying an investment property, the interest on a family loan used for the deposit may be deductible, but you'll need loan statements and clear records to satisfy the ATO.

When lenders treat family loans as gifts anyway

Some lenders will accept a family loan agreement on paper but still treat the borrowed amount as a gift in their serviceability assessment if the repayment term is longer than ten years or if the monthly repayment is under a certain threshold. That threshold varies by lender, but $200 per month is a common cut-off. Below that amount, the lender assumes the repayment won't genuinely affect your lifestyle and excludes it from their calculations.

This can work in your favour if you want the loan recorded for family reasons but don't want it to reduce your borrowing capacity. Discussing your specific numbers with a broker before drafting the agreement means you can structure it in a way that satisfies both the lender and your family member.

Recording the transfer correctly

When the family member transfers the funds into your account, make sure the transaction description is clear and the money comes from an account in their name. Lenders will ask for three months of bank statements, and they'll want to see exactly where the deposit came from. A transfer labelled "loan from Mum" is more useful than a generic deposit with no reference.

If the funds pass through multiple accounts or come from a joint account shared with someone who isn't party to the loan agreement, you may need a letter from the account holder explaining the source. Cash deposits are treated with suspicion and often require a statutory declaration and additional documentation. The cleaner the paper trail, the faster the assessment.

If you're planning to use the family loan alongside a government scheme like the Australian Government 5% Deposit Scheme, available through participating lenders for eligible first home buyers, make sure your combined genuine savings and loan amount meet the lender's requirements. Some lenders require at least 5% of the deposit to come from your own verified savings, even when a family loan covers the rest.

Protecting the relationship when things change

A signed agreement doesn't just protect the lender. It protects your relationship with the family member if your income drops, if they need the money back sooner than expected, or if other siblings or relatives question the arrangement later. Money is one of the fastest ways to fracture a family, and a piece of paper that both parties signed when everyone was calm and optimistic is worth its weight in avoided arguments.

If your circumstances change and you can't meet the repayment schedule, talk to the family member as early as possible. Depending on the terms, you may be able to renegotiate the schedule, pause repayments temporarily, or convert part of the loan to a gift if they're comfortable with that. Those changes should be recorded in an updated agreement and provided to your lender if the original loan was disclosed during your application.

Calls to one of our team or booking an appointment at a time that works for you means you can talk through the structure before the paperwork is signed, so the agreement works for your application and your family at the same time.

Frequently Asked Questions