Family Loan Agreements and What Not to Overlook

A family loan can help you reach the deposit threshold for a Carnegie property without waiting years to build savings.

Lenders treat gifted funds differently to borrowed funds, and the distinction affects whether you qualify for a home loan at all. A verbal arrangement might feel sufficient between family members, but it creates problems when the bank asks for proof of genuine savings or questions whether the deposit needs to be repaid. The formality you need depends on whether the funds are a true gift, a loan you'll repay informally, or a documented loan with scheduled repayments. Each structure produces different lending outcomes.

How Lenders Assess Funds From Family

Borrowed funds increase your total debt, even when repayments are informal. Lenders include family loan repayments in serviceability calculations when the loan is documented or when the bank identifies the funds as a loan during the application process. Gifted funds do not create a debt obligation and do not affect your borrowing capacity, but you need a signed statutory declaration from the person providing the gift to confirm the funds are non-repayable. Without that declaration, the lender may treat the funds as a loan and either reduce your approved loan amount or decline the home loan application altogether.

Consider a scenario where parents provide $60,000 toward a Carnegie apartment purchase. If the funds are documented as a loan with monthly repayments of $500, that repayment reduces borrowing capacity by around $90,000 to $100,000 depending on the lender's assessment rate. If the same funds are gifted with a statutory declaration, the full amount strengthens the deposit and borrowing capacity remains unchanged.

Most lenders require the statutory declaration to specify that the funds are a gift, that no repayment is expected, and that the donor has no interest in the property. The person providing the gift usually needs to provide bank statements showing the funds leaving their account. Some lenders also ask the donor to confirm they can afford to give the funds without financial hardship, particularly when the amount is substantial.

When a Documented Family Loan Makes Sense

A formal loan agreement between family members creates clarity around repayment terms and protects both parties if circumstances change. The agreement should specify the loan amount, interest rate if applicable, repayment schedule, and what happens if the borrower sells the property or refinances. You can structure the loan as interest-free, or include a nominal rate that still sits below commercial lending rates.

Lenders accept documented family loans but will assess them as part of your total debt position. That means the monthly repayment reduces how much you can borrow from the bank. Some lenders allow family loans to be subordinated, meaning the family loan ranks behind the bank's mortgage if the property is sold. Subordination can improve your application outcome, though not all family members are comfortable with that arrangement.

In a scenario where a buyer borrows $50,000 from a family member with a written agreement requiring repayments of $400 per month, the lender treats that $400 as a committed expense. The buyer's maximum loan amount drops accordingly. If the family loan is subordinated and repayments are deferred until after settlement, some lenders will exclude the repayment from their serviceability assessment during the initial application, though the subordination deed must be prepared by a solicitor and registered if the lender requires it.

Structuring Funds as a Gift to Maximise Borrowing Capacity

Gifted funds allow you to increase your deposit without reducing how much the bank will lend. The donor completes a statutory declaration stating the funds are a gift with no repayment required, and the declaration is submitted with your home loan application. The declaration must be signed in front of an authorised witness such as a solicitor, Justice of the Peace, or pharmacist.

Banks also look at whether the gifted funds count as genuine savings. Genuine savings typically means funds held in your account for at least three months, though the definition varies by lender. If the gift is deposited into your account and you apply immediately, some lenders may not treat those funds as genuine savings, which can affect your ability to access certain home loan products or interest rate discounts. Other lenders accept gifted funds without a waiting period, particularly when the donor is a parent or immediate family member.

Carnegie properties near Koornang Road and around the Carnegie Primary School catchment continue to attract buyers with family support. The median unit price in the surrounding Glen Eira area has remained stable, and buyers using gifted deposits are securing approvals without the borrowing capacity reductions that come with documented loans.

Family Loans and Lenders Mortgage Insurance

If your deposit is less than 20% of the property value, the lender usually requires you to pay Lenders Mortgage Insurance. LMI protects the lender if you default on the loan, and the premium can range from a few thousand dollars to tens of thousands depending on your loan amount and deposit size. Some lenders allow gifted funds to be included in your deposit for LMI calculation purposes, while others require a portion of the deposit to come from your own verified savings.

Borrowed funds, even when documented and subordinated, generally cannot be counted toward the deposit component that reduces your LVR. If you borrow $40,000 from family and contribute $20,000 of your own savings toward a property purchase, the lender may calculate your LVR based only on the $20,000 genuine savings figure. That calculation affects both your LMI premium and whether the lender will approve the loan at all.

Buyers relying on a mix of family support and personal savings should clarify with their broker which lenders treat those funds most favourably. Some lenders offer more flexibility around gifted deposits for first home buyers, particularly when combined with the Australian Government 5% Deposit Scheme, though the scheme has specific rules about what portion of the deposit can be gifted.

Documenting the Agreement to Protect Both Parties

Whether the funds are a gift or a loan, proper documentation avoids confusion and protects the relationship. A statutory declaration for a gift is straightforward and can be arranged through a solicitor or by using a template that meets the requirements of the Statutory Declarations Act 1959. If the funds are a loan, the agreement should be drafted or reviewed by a solicitor to confirm it reflects both parties' intentions and includes enforceable terms.

Repayment schedules should be realistic and aligned with your income. If your family member expects monthly repayments but your income is irregular, you might negotiate quarterly payments or allow for flexible timing during the first year. Including a clause that allows early repayment without penalty gives you the option to refinance or pay down the family loan when your financial position improves.

If the family member providing the loan wants security over the property, that requires registering a second mortgage, which most banks will not permit unless the family loan is subordinated. Subordination means the family member's interest ranks behind the bank's mortgage, and the bank is repaid first if the property is sold. The subordination deed must be prepared by a solicitor and lodged with the bank before settlement. Not all family members are willing to subordinate their loan, and in those cases, the bank may decline the application or require the family loan to be converted to a gift.

Tax and Legal Considerations for Family Loans

Family loans do not usually create tax obligations for the borrower, but if the loan includes an interest rate above a nominal amount, the lender may need to declare the interest as income. The ATO does not require interest to be charged on family loans, and most families structure them as interest-free to keep the arrangement simple. If the loan is forgiven later, there may be capital gains tax or gift duty implications depending on the circumstances, though Australia does not currently have a federal gift tax.

If the family member providing the funds is receiving an age pension or other Centrelink benefits, gifting a large amount may affect their entitlements. Centrelink has gifting rules that limit how much can be given away in a financial year without affecting pension eligibility. Those limits should be reviewed with a financial adviser before the funds are transferred.

When the property being purchased is an investment property, the tax treatment of loan repayments and interest may differ. Borrowers should speak to an accountant before finalising any family loan arrangement involving an investment purchase.

Call one of our team or book an appointment at a time that works for you. We'll review your deposit structure, confirm how your lender will assess any family contribution, and make sure the documentation meets the bank's requirements before you apply.

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