A family loan agreement is a written contract between you and a family member who lends you money for a home deposit.
Most lenders need to see that agreement before they approve your loan. If they cannot confirm whether the money is a loan or a gift, your application will either stall or get knocked back. That matters in Avoca where buyers are often stretching to meet deposit requirements on Central Coast properties, especially in a market where many families are chipping in to help.
Why Lenders Care Whether the Money Is a Loan or a Gift
Lenders want to know if you are taking on another debt obligation before they commit to lending you hundreds of thousands of dollars. If the money from your family is actually a loan, you will owe repayments on that debt as well as your mortgage. That affects your borrowing capacity. If the money is a genuine gift, it improves your position by reducing the amount you need to borrow, or lifting your deposit enough to avoid Lenders Mortgage Insurance.
Consider a buyer in Avoca who borrows $50,000 from a parent to reach a 20% deposit at the suburb's current median. If that $50,000 comes with a monthly repayment obligation, even an informal one, the lender will adjust your borrowing capacity downward to account for that extra commitment. Without a written agreement declaring the funds as a genuine gift with no repayment terms, the lender will default to treating it as a loan with monthly repayments included in their serviceability calculations.
What a Family Loan Agreement Should Include
A compliant family loan agreement sets out the loan amount, the repayment terms, the interest rate if any, the loan duration, and the conditions under which the loan will be repaid. It should confirm whether the loan is secured against the property. It should be dated and signed by both parties.
If the money is genuinely a gift rather than a loan, you need a signed statutory declaration from the family member stating that the funds are given without expectation of repayment and do not create a mortgage, charge, or caveat over the property. That declaration has to be witnessed by an authorised person. Without it, the bank will not treat the money as a gift no matter what your verbal assurance is. In our experience, the gift declaration is the single most common document missing from applications that involve family help, and it causes more delays than almost anything else.
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When a Formal Loan Makes More Sense Than a Gift
Sometimes a gift declaration is not realistic. The family member might need the money repaid within a set timeframe, or they want security over the property until they are repaid. That is perfectly workable, but it changes how the application is structured.
A buyer purchasing a unit in Avoca with help from an older sibling might agree to repay the loan over five years once the property settles. That agreement needs to show a fixed monthly repayment amount and a clear end date. The lender will include that monthly repayment in the debt-to-income calculation, which means your borrowing capacity will drop. In this scenario, the buyer would need a higher income or a lower purchase price to offset that extra commitment. The agreement also needs to specify whether the sibling is taking a second registered mortgage over the property. If they are, the bank needs to approve that, because it affects their security position as the first mortgagee.
Most lenders will not approve a second mortgage unless the combined loan-to-value ratio stays under 80%, and some will not approve it at all. That is a conversation to have before the family member commits the money, not after contracts are signed.
How Lenders Assess Your Capacity When Family Loans Are Involved
Even if the family loan is interest-free, lenders will assume a repayment amount when calculating your serviceability. APRA prudential standards require lenders to assess your ability to service the full debt load at a buffer rate, and that includes any family loan unless it is formally declared as a gift with no strings attached.
If your family loan agreement shows no set repayment schedule, the lender will apply a notional repayment, often calculated as principal and interest over a five-year term. That assumption can wipe out thousands of dollars in borrowing capacity. For buyers in Avoca relying on that family contribution to hit their deposit target, losing borrowing capacity can mean the property they want is now out of reach.
If the family loan is structured with interest, even at a below-market rate, the lender will factor in both principal and interest repayments when assessing your application. That is one reason interest-free family loans often work better from a borrowing capacity perspective, provided they are still documented properly.
Tax and Legal Considerations You Should Not Ignore
If the family member is charging interest on the loan, they may need to declare that interest as income on their tax return. If the loan is not structured with market-rate interest, the ATO could potentially treat it as a Division 7A arrangement if a private company is involved, or assess whether the arrangement is genuinely at arm's length. That risk is mostly relevant when trusts or companies are part of the structure, but it is worth flagging with your accountant before anything is signed.
If the loan is secured by a second mortgage or a caveat, that needs to be registered on the property title. The first mortgagee has to consent to that registration, which is another layer of approval before settlement. If the family member wants security but the lender will not accept a second mortgage, the buyer has to either negotiate different loan terms or find another source for the deposit.
Family loan agreements also protect both parties if circumstances change. If the borrower sells the property or refinances before the loan is repaid, the agreement should outline how the outstanding balance is settled. If the lender passes away or their financial situation shifts, the agreement clarifies what happens to the debt. Without that documentation, family disputes over money can escalate quickly, especially when property is involved.
What Happens If You Do Not Formalise the Arrangement
If you receive money from family and cannot prove whether it is a gift or a loan, most lenders will not proceed. They might ask you to hold those funds in your account for three months and provide a savings history to demonstrate genuine savings instead, which delays your purchase timeline and might mean missing out on the property you wanted.
Some buyers try to work around this by not disclosing the family contribution at all, but that creates a different problem. Lenders require full disclosure of all deposit sources, and they will check your bank statements going back at least three months. If a large deposit appears without explanation, they will ask for proof of its origin. If you cannot provide that proof or if the explanation does not match the transaction history, your application can be declined on the grounds of incomplete or misleading information. That can also affect your ability to apply elsewhere, because declined applications get noted.
Call one of our team or book an appointment at a time that works for you. We will help you structure the family loan agreement properly from the start so it supports your home loan application rather than complicating it, and so everyone involved has clarity on what happens next.
Frequently Asked Questions
Does a family loan agreement need to be written down?
Yes. Lenders require a signed, written agreement that sets out the loan amount, repayment terms, interest rate, and duration. Without it, they will not approve your application or will treat the money as debt with assumed repayments that reduce your borrowing capacity.
What is the difference between a family loan and a gift for mortgage purposes?
A gift has no repayment obligation and requires a signed statutory declaration from the family member confirming that. A loan creates a debt that lenders include in your serviceability assessment, which reduces how much you can borrow.
Can my family member register a second mortgage over the property?
Only if your lender approves it. Most lenders will not allow a second mortgage unless the combined loan-to-value ratio stays under 80%, and some do not allow it at all. You need lender consent before any second mortgage or caveat is registered.
What happens if I do not declare a family loan to my lender?
Lenders check your bank statements for all deposit sources. If a large deposit appears without explanation, they will ask for proof of origin. Failing to disclose the source or providing misleading information can result in your application being declined.
How do lenders assess my borrowing capacity if I have a family loan?
They include the loan repayments in your debt obligations, even if the loan is interest-free. If no repayment schedule exists, lenders assume a notional repayment over five years, which can reduce your borrowing capacity significantly.
