Family Loan Agreements & What Not to Miss

A family loan agreement is a formal document that records when a family member provides funds for your property purchase. Lenders need to see this agreement to confirm whether the money is a loan that affects your borrowing capacity or a gift that doesn't.

Many ACT Government employees reach out to family for deposit help when buying in Canberra's tight property market. The difference between calling it a gift and calling it a loan changes how much you can borrow. Get the paperwork wrong and your home loan application can stall days before settlement.

When a Family Loan Counts Against Your Borrowing

If the money needs to be repaid, it counts as a liability. Lenders reduce your borrowing capacity by factoring in a monthly repayment on that debt, even if your family member isn't charging interest or expecting regular payments. The agreement should state the loan amount, repayment terms, interest rate if any, and whether repayment is required before settlement or over time.

Consider a policy officer receiving funds from a parent to cover part of the deposit. If the agreement says the amount must be repaid within five years, the lender calculates a monthly repayment and subtracts that from your income when assessing borrowing capacity. That calculation can reduce your loan amount by tens of thousands, depending on the sum involved. If the same amount is documented as a non-repayable gift with a statutory declaration, it doesn't affect your borrowing capacity at all.

Structuring the Agreement to Satisfy Lenders

Lenders want clarity. The agreement should be signed, dated, and include full names, addresses, and the relationship between the parties. It should state whether the funds are a gift or a loan and, if a loan, outline the repayment schedule and interest rate.

If your family member provides funds as a gift, they'll need to sign a statutory declaration confirming the money doesn't need to be repaid. That declaration should state they have no legal interest in the property. Lenders won't accept verbal assurances. The paperwork needs to be in place before home loan pre-approval can be finalised.

What Happens When Repayment Terms Are Vague

Some agreements include phrases like "repay when you can" or "no fixed term". Lenders treat these as ongoing liabilities because there's no defined end date. That means they'll either decline the application or apply a higher repayment estimate, which reduces how much you can borrow.

In our experience, this issue comes up when family members want to help without creating financial pressure. The intention is to keep things informal, but lenders interpret vague terms as risk. If you're working with family funds, document the arrangement clearly or structure it as a gift from the outset.

Gifts Versus Loans and the Impact on Deposit Requirements

When a family member provides a gift, that amount counts toward your deposit and can help you reach the threshold required to avoid Lenders Mortgage Insurance or access an LMI waiver. If the same amount is structured as a loan, it doesn't count as genuine savings or a deposit contribution.

For ACT Government employees with access to LMI waivers, this distinction matters. A documented gift can push your deposit over the minimum requirement, while a loan might leave you needing to save more before you can proceed. The family member providing the gift must also show the funds have been in their account for at least three months, or provide evidence of where the money came from, such as the sale of an asset or a term deposit maturity.

Recording Security Interests and Second Mortgages

Some family members want security for the funds they provide. If the agreement includes a second mortgage or caveat over the property, the primary lender needs to approve that arrangement before settlement. Most lenders won't proceed if another party has a registered interest in the property without prior consent.

If your family member insists on security, speak to your mortgage broker before finalising the agreement. Some lenders allow second mortgages if the family member agrees to subordinate their interest, meaning they accept the primary lender has first claim in the event of a sale. That subordination must be documented and registered.

Tax and Legal Implications for Both Parties

Family loans can create tax obligations if interest is charged below market rates or if the Australian Taxation Office views the arrangement as a gift that wasn't declared. Your family member should speak to an accountant before providing funds, particularly if the amount is significant.

If the loan is repaid, there's generally no capital gains tax issue. If the funds are forgiven later, that forgiveness might be treated as a gift for tax purposes depending on the amount and your family member's circumstances. For ACT Government employees, these considerations don't usually affect the loan application itself, but they matter for the family member providing the funds.

Documentation the Lender Will Request

You'll need to provide the signed agreement, a statutory declaration if the funds are a gift, and bank statements showing the deposit of funds into your account. Lenders also want to see the source of funds from the family member's side, including statements showing the withdrawal and evidence of how the money was accumulated.

If the funds came from the sale of an asset, your family member will need to provide a settlement statement. If the money was transferred from an offset account linked to their mortgage, the lender will want to see that account history. The requirement is to prove the funds are legitimate and not borrowed from another source, which would add another layer of liability.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions