A family loan agreement is a formal document that records money given by a family member toward your deposit, setting out whether it's a gift or a loan to be repaid.
Most lenders across Australia want to see that your deposit comes from genuine savings or a legitimate gift. When a family member helps with your deposit, the lender needs written confirmation about the nature of that money. Without a properly structured agreement, your home loan application can stall or be declined, even when you have enough funds to proceed.
Why Lenders Ask About Family Contributions
Lenders assess your borrowing capacity based on your ability to service the loan without hidden debts.
If a family member gives you money and the lender can't confirm whether it's a gift or a loan you need to repay, they'll treat it as a potential liability. That affects your serviceability because repaying a family member reduces the income available for your mortgage. A signed family loan agreement clarifies this immediately, either confirming the funds are a gift with no repayment obligation or setting out repayment terms the lender can factor into their assessment.
What a Proper Family Loan Agreement Must Include
Your agreement needs to state who is providing the money, how much is being provided, and whether it's a gift or a loan.
If it's a gift, the document should explicitly state there's no obligation to repay and no interest charged. Most lenders will also want a statutory declaration from the person providing the funds. If it's a loan, the agreement must include the loan amount, interest rate (even if it's zero percent), repayment terms, and what happens if circumstances change. Lenders will include these repayments when calculating your borrowing capacity, which may reduce the loan amount you can access.
How a Gift Affects Your Loan Approval Compared to a Loan
A genuine gift doesn't reduce your borrowing capacity because there's no repayment obligation.
Consider a buyer who receives $40,000 from parents as a deposit contribution. If that money is documented as a gift with a statutory declaration, the lender treats it as part of your savings and it doesn't impact your serviceability. If it's structured as a loan with monthly repayments of $500, that repayment gets added to your monthly commitments, reducing the loan amount you qualify for by roughly $90,000 to $100,000 depending on your rate and loan term. The documentation you provide determines which path the lender takes.
Ready to get started?
Book a chat with a Mortgage Broker at Dunn Bay Home Loans & Finance today.
When a Family Loan Still Requires Lenders Mortgage Insurance
Receiving a family contribution doesn't automatically remove the need for LMI if your deposit is below twenty percent.
Your loan to value ratio is calculated based on the total deposit you have, including family contributions. If you're buying in a regional WA area and your deposit including the family funds brings you to fifteen percent, you'll still pay Lenders Mortgage Insurance because you're above the eighty percent LVR threshold. Some lenders offer family guarantee arrangements where a parent uses equity in their own property instead of cash, which can help you avoid LMI, but that's a different structure to a family loan agreement and involves different risks for the guarantor.
Structuring Repayment Terms That Work for Everyone
If you're documenting a loan rather than a gift, the repayment terms need to be realistic for your budget and acceptable to the lender.
In our experience, vague terms like "repay when you can" won't satisfy a lender's credit assessment. You need a defined repayment schedule, even if it's interest-free or deferred for a set period. One option is to structure repayments to start after an initial period, giving you time to settle into your mortgage. Another is to set a lump sum repayment tied to a future event like a refinance or property sale. Whatever structure you choose, it must be documented in the agreement and factored into your borrowing capacity assessment upfront.
What Happens If You Don't Document the Arrangement
Lenders will see unexplained deposits in your bank statements and ask for their source.
If you can't provide a satisfactory explanation or formal agreement, the lender may treat the funds as borrowed money with estimated repayments, or they may decline the application entirely. This delays settlement and can put your purchase at risk if you're working to a contract deadline. It also creates tension within families when informal arrangements aren't honoured or expectations differ. Writing it down protects both parties and keeps your loan approval on track.
Seeking Advice Before Signing Anything
Both parties should understand the legal and financial implications before finalising a family loan agreement.
While a mortgage broker can guide you on what lenders require, the agreement itself is a legal document. It's worth having a solicitor review the terms, particularly if the loan amount is significant or repayment is tied to property sale or other conditions. In WA, family dynamics and property settlements can get complicated, and a properly drafted agreement protects everyone if circumstances change down the track. The cost of getting it right upfront is small compared to the cost of disputes or loan complications later.
If you're working through a family contribution toward your deposit and want to make sure it's structured correctly for your loan application, call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
What is a family loan agreement for a home loan?
A family loan agreement is a formal document that records money given by a family member toward your deposit, stating whether it's a gift or a loan to be repaid. Lenders require this to assess your borrowing capacity accurately and confirm you don't have hidden debts.
Does a family gift affect my borrowing capacity?
A genuine gift documented with a statutory declaration doesn't reduce your borrowing capacity because there's no repayment obligation. If the money is structured as a loan with repayments, those repayments reduce the amount you can borrow by affecting your serviceability.
What happens if I don't document a family contribution?
Lenders will see unexplained deposits and may treat them as borrowed money with estimated repayments, or decline your application. This can delay settlement and create complications if you're working to a contract deadline.
Will a family loan remove the need for Lenders Mortgage Insurance?
Not automatically. Your loan to value ratio is based on your total deposit including family contributions, so if you're still below twenty percent deposit you'll likely pay LMI. A family guarantee using property equity is a different arrangement that may help avoid LMI.
What should be included in a family loan agreement?
The agreement must state who is providing the money, the amount, and whether it's a gift or loan. For loans, include the interest rate, repayment terms, and conditions. For gifts, explicitly state there's no repayment obligation, and provide a statutory declaration.
