Family Loan Agreements and What You Need to Know

Understanding Family Loan Agreements for Property Purchase

When you're looking to achieve home ownership, sometimes the Bank of Mum and Dad (or other family members) can seem like the perfect solution. Family loan agreements have become increasingly common across Australia as property prices continue to rise and first-time buyers search for ways to enter the market.

A family loan agreement is exactly what it sounds like - a formal arrangement where a family member lends you money to help with your property purchase. This could be for your deposit, to reduce your loan amount, or to help improve your borrowing capacity when applying for a home loan.

While borrowing from family might feel more relaxed than dealing with banks and lenders, it's important to treat these arrangements with the same level of professionalism. Having a proper agreement in place protects both you and your family member, ensuring everyone understands the terms and preventing potential disputes down the line.

How Family Loan Agreements Work

A family loan agreement typically involves one family member lending money to another to assist with purchasing property. The loan can be structured in several ways:

• Interest-free loans: No interest charges apply, though this may have tax implications
• Interest-bearing loans: Similar to a traditional home loan, with an agreed interest rate
• Gift vs loan: Sometimes what starts as a loan converts to a gift, which needs clear documentation

When you apply for a home loan with a bank or lender, they'll want to know about any family loans. This affects your borrowing capacity because it represents another financial commitment you'll need to manage alongside your mortgage repayments.

Lenders will typically ask for a signed family loan agreement and may require a statutory declaration stating whether the funds are a loan or a gift. If it's a loan, the lender will factor these repayments into their assessment of your finances.

Key Elements of a Formal Family Loan Agreement

To ensure your family loan agreement is legally sound and acceptable to mortgage lenders, it should include:

1. Loan amount: The exact dollar amount being borrowed
2. Repayment terms: How much you'll repay and how often
3. Interest rate: Whether interest applies and at what rate (could be 0%)
4. Loan duration: The timeframe for repaying the loan
5. Security: Whether the loan is secured against the property
6. Default terms: What happens if you can't make repayments

Having these terms documented protects everyone involved. Your family member has clarity about when they'll see their money returned, and you have a clear roadmap for repayment that won't surprise you later.

The Impact on Your Home Loan Application

When you compare rates and home loan options from banks and lenders across Australia, you'll find they all assess your financial position differently. However, they all need to understand your complete financial picture.

A family loan can affect your home loan application in several ways:

Borrowing Capacity: If you're making regular repayments on a family loan, this reduces the amount you can borrow for your mortgage. Lenders calculate how much you can afford based on your income minus your expenses and existing debts.

Loan to Value Ratio (LVR): If the family loan is helping you build a larger deposit, you might achieve a better LVR. This could mean avoiding Lenders Mortgage Insurance (LMI) if you can reach a 20% deposit, potentially saving you thousands of dollars.

Deposit Requirements: Some lenders may not accept borrowed funds as genuine savings. This is why understanding different home loan options and working with a mortgage broker can be valuable - we know which lenders are more flexible with family loan arrangements.

Family Loans vs Parental Guarantee Loans

It's worth noting that family loan agreements are different from parental guarantee loans. With a parental guarantee, your family member uses equity in their own property as security for your home loan, rather than lending you cash directly.

Both options can help you access home ownership sooner, but they work differently and have different implications for everyone involved. A parental guarantee affects your parent's property, while a family loan agreement is a cash transaction that may impact your borrowing capacity.

Tax and Legal Considerations

Family loan agreements can have tax implications for both parties. If your family member is charging interest, they may need to declare this as income. If they're not charging interest, the Australian Taxation Office might view this differently than a commercial arrangement.

It's worth consulting with a legal professional or accountant to ensure your family loan agreement is structured appropriately. This investment in professional advice can prevent costly issues later.

Protecting Family Relationships

Money and family can be a challenging combination. While a family loan might seem like a caring gesture, disagreements about money are one of the leading causes of family disputes.

To protect your relationships:

• Put everything in writing, even if it feels uncomfortable
• Be realistic about what you can afford to repay
• Keep communication open about your financial situation
• Make repayments on time, just as you would with a bank
• Consider what happens if circumstances change (job loss, illness, relationship breakdown)

Combining Family Loans with Traditional Home Loans

Many Australians use a combination of family assistance and traditional home loan products to purchase their property. You might receive a family loan for part of your deposit, then secure a home loan for the remaining amount.

When calculating home loan repayments, remember to factor in both your mortgage and your family loan obligations. You'll want to ensure you can comfortably manage both while maintaining your financial stability.

Depending on your situation, you might consider different home loan features:

• Variable rate: Flexibility to make extra repayments on your mortgage
• Fixed rate: Certainty about your mortgage repayments while you also manage family loan repayments
• Split rate: Combining both variable and fixed portions
• Offset account: Using a linked offset to reduce interest charges
• Principal and interest: Building equity in your property from day one

Comparing home loan rates and features helps you find a loan structure that works alongside your family loan commitment. Some borrowers prefer a variable interest rate for flexibility, while others choose a fixed interest rate home loan for predictable repayments.

Getting Professional Support

Whether you're considering a family loan agreement, exploring first home loan options, or looking to refinance your existing mortgage, professional advice makes a difference.

As a mortgage broking business, Personalised Finance works with clients nation-wide to access home loan options from banks and lenders across Australia. We understand how family loan agreements impact your home loan application and can help you find lenders who work with your specific circumstances.

We can assist with:

• Understanding how a family loan affects your borrowing capacity
• Comparing current home loan rates and home loan packages
• Home loan pre-approval while managing a family loan commitment
• Finding home loan products with features that suit your situation
• Accessing interest rate discounts and rate discount opportunities

Every family's situation is unique, and cookie-cutter solutions don't work when you're dealing with both family finances and property purchases.

If you're considering a family loan agreement to help with your property purchase, or if you already have one in place and need to understand how it impacts your mortgage options, we're here to help. Call one of our team or book an appointment at a time that works for you. Let's discuss how to structure your finances to achieve home ownership while protecting your family relationships and securing your financial future.