Unlock the Secrets to Family Loan Agreements

A family loan agreement formalises money given or lent by relatives for your deposit or settlement costs.

Lenders across Australia treat family contributions differently depending on whether the money is gifted or loaned, and the documentation you provide determines whether they increase your borrowing capacity or reduce it. In Western Australia, where median prices continue to climb in suburbs like Mount Hawthorn and Subiaco, family help is becoming a more common part of the deposit strategy. Getting the paperwork right means the difference between a lender treating that $30,000 from your parents as genuine savings or flagging it as an undisclosed liability.

Gifted Deposits and What Lenders Actually Want to See

A gifted deposit is money your family gives you without any expectation of repayment. Most lenders will accept gifted funds as part of your deposit, provided you can show a signed statutory declaration from the person giving the money, confirming it's a gift and not a loan. That declaration needs to state clearly that there's no obligation to repay and no interest or security attached. Some lenders also ask for bank statements showing the donor had the funds available before the transfer, particularly if the amount is above $10,000.

Consider a buyer in Joondalup who receives $40,000 from their parents toward a unit deposit. If the parents sign a statutory declaration stating the funds are gifted, that $40,000 is treated as genuine savings and increases the buyer's deposit without affecting their borrowing capacity. Without that declaration, the lender may treat the funds as a loan and reduce how much they're willing to lend, because the buyer now has an additional debt obligation even if there's no formal loan contract in place.

How a Family Loan Affects Your Application

Money loaned by family is treated as a liability if there's any agreement to repay it, even informally. Lenders will typically impute a monthly repayment based on the loan amount and reduce your borrowing capacity accordingly. The imputed repayment is often calculated at a higher rate than what you might actually be paying your family, which can cut your maximum loan amount by tens of thousands of dollars.

In our experience, buyers who assume an informal arrangement won't be discovered often find themselves in a difficult position during the application process. If bank statements show regular transfers back to a family member after settlement, a lender reviewing your home loan application may question whether undisclosed debt exists. That can delay approval or lead to the loan being declined altogether.

To avoid this, if the money genuinely is a loan, document it properly with a formal family loan agreement that sets out the loan amount, repayment terms, interest rate (even if it's zero), and whether the loan is secured. Some lenders will accept a family loan as long as it's disclosed and the repayment is included in your servicing calculations. Others won't lend at all if a family loan exists, particularly if it's secured against the property you're buying.

Family Guarantee and When It Replaces a Cash Deposit

A family guarantee is different from a cash gift or loan. It allows a family member, usually a parent, to use equity in their own property as security for part of your loan, reducing or eliminating the need for you to save a cash deposit. The guarantor doesn't hand over money upfront. Instead, they offer their property as additional security, and the lender places a caveat or mortgage over a portion of that property's value.

This structure is common in Western Australia for buyers entering the market in areas like Scarborough or Applecross, where entry prices make saving a 20% deposit difficult without years of delay. A guarantor can cover the shortfall between your deposit and the amount needed to avoid Lenders Mortgage Insurance, or even allow you to borrow up to 100% of the purchase price plus costs if the guarantor's equity is sufficient.

The guarantor is liable only for the portion of the loan they guarantee, not the entire amount. For example, if you're borrowing $500,000 and your parents guarantee $100,000, their liability is limited to that $100,000. The lender will assess the guarantor's income and existing debts to confirm they can service the guaranteed portion if you default. Once you've built enough equity in your own property, usually by paying down the loan or through capital growth, you can apply to have the guarantee removed. Most lenders allow this once your loan to value ratio drops below 80%.

Statutory Declarations and the Documentation Lenders Require

Whether you're receiving a gift, a loan, or a guarantee, the lender will ask for specific documents to verify the arrangement. For a gifted deposit, that's a signed statutory declaration from the donor and evidence of the transfer. For a family loan, it's a written loan agreement signed by both parties, detailing the terms. For a guarantee, the guarantor will need to attend a separate legal appointment to receive independent advice, and the solicitor will provide a certificate confirming the guarantor understands the risks.

Lenders in Western Australia follow the same process as those in other states, but turnaround times for solicitor appointments can vary depending on location. In regional areas, it may take longer to arrange the independent legal advice required for a guarantor, which can push out settlement timeframes. If you're working to a tight settlement date, factor in at least two weeks for the guarantor's legal process, and ensure your solicitor is aware of the arrangement early.

We regularly see buyers who assume a handwritten note from their parents will satisfy the lender's requirements. It won't. The statutory declaration needs to be signed in front of an authorised witness, and the family loan agreement should be prepared by a solicitor to ensure it meets the lender's criteria. If the documentation is incomplete or inconsistent with your bank statements, the lender will ask for clarification, and that delays your approval.

How This Sits Alongside Other Deposit Strategies

Family contributions often work in combination with other approaches, particularly for buyers using a low deposit loan or accessing a guarantor home loan. If you're putting down 5% from your own savings and your parents are gifting another 5%, you may still be able to avoid LMI if the guarantor covers the remaining shortfall. Alternatively, if you've saved 10% and your parents loan you another 5%, that loan needs to be disclosed and the repayment factored into your servicing.

The key is to structure the arrangement before you apply, not during the application. Once a lender sees unexplained deposits in your bank statements, they'll require a paper trail that goes back several months. If the money came from a family member and you didn't document it at the time, you'll need to obtain a retrospective declaration, and some lenders won't accept that. Planning the structure upfront avoids those issues and keeps your application moving.

Call one of our team or book an appointment at a time that works for you. We'll review your situation, confirm what documentation your lender will need, and structure the family contribution in a way that protects your borrowing capacity and keeps everyone's position clear from the outset.

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