You don’t need us to tell you that buying a home in Australia has become brutally expensive. The deposit alone on an average home now sits north of $135,000, it takes most buyers over five years to save it, and the average first home buyer is now 34 years old.
Research shows (and I asked BlueRock’s team of mortgage brokers who anecdotally confirmed) that over half of all first home buyers now rely on some form of financial support from parents. No wonder the Bank of Mum and Dad is now one of the country's biggest lenders.
What many people miss is that around 75% of parents who help don’t expect to be repaid! The Bank of Mum and Dad is quietly becoming the Gift of Mum and Dad. And that’s where the legal problems begin.
Why a handshake isn’t enough
I know that drawing up a family loan agreement with your own kids feels awkward. There’s an unspoken assumption that “we’re family, we’ll sort it out.” But informal family loans are one of the most common sources of dispute we encounter.
Without clear documentation, questions inevitably arise:
- Was it a loan or a gift? Without a written agreement, a court can characterise it either way - and not necessarily the way the parents intended.
- What happens if the relationship breaks down? Under the Family Law Act 1975, a former partner may argue the money was a contribution to the relationship, not a debt.
- What about the statute of limitations? In Victoria, the limitation period for a simple contract debt is six years. Without periodic written acknowledgements, the right to recover the loan can simply expire.
- What if funds come from a family company or trust? Division 7A of the Income Tax Assessment Act 1936 imposes strict requirements around minimum interest rates, maximum terms, and minimum yearly repayments. Non-compliance can trigger deemed dividends and unexpected tax liabilities.
The gift letter trap
Here’s a scenario we see regularly: parents lend their child money for a house deposit. The bank requires a ‘gift letter’, which is a signed declaration that the money is a gift, not a loan. Parents sign it, thinking it’s just paperwork. Then life happens...
Let’s say the child’s relationship breaks down. Suddenly that $100,000 ‘gift’ is being treated in family law proceedings as exactly that, a gift, and the parents have a signed document working against them. Or the child faces financial difficulties, and the parents have no legal standing to recover their money because there was never a formal family loan agreement in place. These scenarios are entirely preventable.
What a comprehensive Family Loan Agreement typically covers:
- The loan amount, interest rate, and repayment schedule; creating a clear, enforceable obligation.
- Security provisions; such as a caveat on the property title, giving the lender real protection.
- Family law protections; including acknowledgements that the funds are a loan (not a gift), and careful management of the gift letter issue.
- Independent legal advice; if a home loan guarantor arrangement is in play, the bank of mum and dad should obtain independent legal advice .
- Division 7A compliance; ensuring the arrangement meets ATO requirements where funds come from a company or trust.
- Limitation period management; with built-in mechanisms for periodic debt acknowledgements to preserve the lender’s rights.
- Default and enforcement provisions; so there’s a clear path forward if things don’t go to plan.
The bottom line on family loan agreements
Helping your child buy their first home is one of the most generous things a parent can do. But generosity shouldn’t come at the cost of your own financial security. This is why loan agreements between family members have become essential legal documents for Australian families. Whether you're looking for a simple loan agreement between family members or a more formal parent to child loan contract, legal advice now can save you plenty of financial and family headaches later.
A properly documented Family Loan Agreement protects both sides. It gives parents confidence that their money is safe, and it gives children clarity about their obligations. It’s not about distrust. It’s about doing things properly, so the family relationship stays strong no matter what happens down the track.
At BlueRock, our legal team works with families every day to put these arrangements in place simply, affordably, and with the sensitivity that family matters deserve. If you’re thinking about helping your child into the property market (or you’re the child about to receive help), get in touch via the form below. A short conversation now can save a world of pain later. |
