Family Loan Agreement and How Not to Risk Your Deposit

A family loan can make the difference between buying this year or waiting another two. The risk is that without the right paperwork, your lender may refuse to treat it as genuine savings or equity, and your application stalls just before settlement.

What Lenders Need to See in a Family Loan Agreement

Your lender will assess whether the money from family is a loan or a gift, and the distinction matters because it changes your deposit position and borrowing capacity. A loan increases your debt obligations, which reduces how much you can borrow. A gift does not.

If the money is a loan, the lender needs a signed agreement that sets out the loan amount, whether interest applies, when repayments are due, and whether the loan is secured against the property. The agreement must be dated and signed by both parties. If there is no repayment schedule, or if the terms are vague, most lenders will treat the arrangement as a gift and require a statutory declaration from the family member confirming they have no claim over the property and no expectation of repayment.

Consider a buyer in Bairnsdale purchasing with a 10% deposit. The parents lend $30,000 toward the deposit under a verbal arrangement with no documentation. The lender asks for proof of genuine savings and a family loan agreement. The buyer cannot produce either. The lender treats the $30,000 as a gift, asks for a statutory declaration, and reduces the assessed borrowing capacity by the amount of any informal repayment the buyer intends to make. The application is delayed by three weeks while the family scrambles to draft and sign documents.

When the Loan Is Secured Against the Property

If the family loan is secured by a second mortgage or caveat over the property, the lender calculates your total loan-to-value ratio by adding the family loan and the bank loan together. A $400,000 purchase with a $320,000 bank loan and a $40,000 secured family loan gives you a combined LVR of 90%, not 80%. That triggers Lenders Mortgage Insurance and raises your upfront costs.

Some lenders will not approve a loan where a second mortgage is registered by a family member at settlement. Others will approve it but apply a higher interest rate or require a larger deposit from your own savings. The family member will also need independent legal advice before signing, and that advice must be documented.

Gifted Deposits and the Statutory Declaration

If your family gives you the deposit with no expectation of repayment, the lender will ask for a statutory declaration from the person making the gift. The declaration confirms the money is a gift, not a loan, and that the family member has no financial interest in the property.

The declaration must be signed in front of an authorised witness such as a Justice of the Peace, and it must include the exact amount gifted, the date, and the relationship between the parties. Some lenders also require a bank statement showing the funds leaving the family member's account and arriving in yours, with transaction descriptions that match the declared gift amount.

Genuine Savings and the Three-Month Rule

Most lenders require that at least 5% of the purchase price comes from genuine savings, which means money you have held in your account for at least three months. A family loan or gift deposited two weeks before you apply does not count.

If you are using the Australian Government 5% Deposit Scheme, the genuine savings requirement may be waived by some participating lenders, but the family loan or gift still needs to be documented with either a loan agreement or statutory declaration. The scheme does not change the lender's obligation to assess your total debt position, and an undocumented family loan will delay or derail your application.

How Repayments Affect Your Borrowing Capacity

If the family loan includes a repayment schedule, the lender adds that repayment to your existing debts when calculating your borrowing capacity. A $30,000 family loan repaid at $500 per month reduces your maximum loan amount by around $90,000 to $100,000, depending on interest rates and your income.

If the loan agreement states that repayments are deferred until after settlement, or until you sell the property, the lender may still factor in a notional repayment based on the loan term and amount. Some lenders will accept a letter from the family member confirming that no repayments are required for a specified period, but that letter must be signed, dated, and drafted by a solicitor.

What Happens When the Agreement Is Missing

Without a written agreement or statutory declaration, the lender cannot verify the terms of the family loan, and most will either decline the application or treat the funds as undeclared debt. That means you lose your deposit, your purchase falls through, and you start again with the correct paperwork.

In our experience, the most common mistake is assuming that because the money comes from family, the documentation can be informal. Lenders apply the same standards to family loans as they do to any other debt, and the absence of a signed agreement is treated as a red flag during credit assessment.

If you are buying in Bairnsdale or the surrounding East Gippsland region, where median property values sit below the metro averages, a family contribution of $20,000 to $40,000 can make up the shortfall between what you have saved and what the lender requires. But that contribution only works if the paperwork is lodged at the same time as your home loan application.

Call one of our team or book an appointment at a time that works for you. We will walk you through the documents your lender needs, review your family loan agreement before you sign it, and make sure your deposit is structured in a way that supports your application rather than delaying it.

Frequently Asked Questions