A family loan agreement is a documented arrangement where a family member lends you money toward your deposit, with clear repayment terms and a signed contract.
Your lender will treat this differently to a gift. The loan affects your borrowing capacity because the repayment obligation counts as a debt, even if your family member charges no interest or expects repayment only when you sell. Lenders need to see the agreement in writing and assess whether you can service both the home loan and the family loan simultaneously.
When a Family Loan Makes Sense for Pharmacists
A family loan can work when you need to reach a 10% or 15% deposit to access LMI waivers for pharmacists but don't yet have enough genuine savings. Some lenders will accept a combination of your own savings and a documented family loan as your deposit, provided the loan is properly structured.
Consider a pharmacist earning $95,000 as a hospital clinical pharmacist who has saved $40,000 but needs $60,000 to reach a 10% deposit and avoid paying LMI. A parent offers to lend the additional $20,000, repayable over five years with no interest. The lender will accept this structure only if the family loan agreement is formal, signed by both parties, includes a clear repayment schedule, and the borrower can demonstrate capacity to service both the mortgage and the $333 monthly family loan repayment.
The family loan sits on top of your mortgage serviceability calculation. If your maximum borrowing capacity before the family loan was $580,000, the $333 monthly commitment reduces that by approximately $60,000 to $70,000 depending on the lender's assessment rate. This reduction is unavoidable because lenders must assume you will meet the repayment obligation as documented.
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How the Agreement Must Be Structured
Lenders require the family loan agreement to include the loan amount, the repayment schedule, the interest rate (which can be zero), the term, and signatures from both parties. The document should state whether the loan is secured or unsecured. Most family loans for deposits are unsecured, meaning no property or asset is used as collateral.
You cannot informally agree to repay "whenever" or "if I can". Lenders will not accept vague terms. The repayment schedule must be specific, even if the schedule is interest-free or deferred for a period. If repayment is deferred until sale, the agreement must state that explicitly, and the lender will still assess your capacity to make those future repayments when due.
Some lenders allow a family loan to be documented as repayable on sale only, with no monthly obligation. In this case, the loan does not reduce your monthly serviceability but does reduce the deposit equity you hold in the property. This affects your loan-to-value ratio and may limit access to offset accounts, rate discounts, or certain home loan features offered only to borrowers with higher equity.
The Difference Between a Loan and a Gifted Deposit
A gift does not require repayment and does not affect your borrowing capacity. A loan requires repayment and does affect it. Lenders distinguish between the two by asking for a signed statutory declaration from the family member confirming whether the funds are a gift or a loan.
If your family member is comfortable providing a gift rather than a loan, your borrowing capacity remains higher and the application is less complicated. If the funds must be repaid, documenting the arrangement as a loan is the only transparent option. Misrepresenting a loan as a gift on a mortgage application is mortgage fraud and can result in the loan being called in, legal action, and potential criminal prosecution under the National Consumer Credit Protection Act.
In our experience, many families prefer a documented loan because it protects both parties if circumstances change. A formal agreement provides clarity if the family member needs the funds returned earlier than expected, or if the borrower's financial situation changes.
How Family Loans Affect Access to Government Schemes
The Australian Government 5% Deposit Scheme and Help to Buy scheme both require a minimum deposit from genuine savings or a genuine gift. A loan from a family member does not qualify as genuine savings under the scheme rules administered by Housing Australia.
If you plan to use either scheme, the family member must provide the funds as a gift, not a loan. This is a common issue for pharmacists applying under these programs. The schemes are designed to help buyers who have limited savings, and accepting borrowed funds as part of the deposit would undermine that intent.
State-based concessions and grants generally have no restriction on whether your deposit includes a family loan, provided you meet the residency and occupancy requirements. For example, a first home buyer in Victoria using the stamp duty exemption on a property valued at $580,000 can use a family loan as part of the deposit without affecting eligibility for the concession, provided the buyer moves into the home within 12 months and resides there for at least 12 continuous months.
When a Guarantor Arrangement Is a Better Option
A guarantor loan allows a family member to use equity in their own property as security for part of your home loan, removing the need for you to borrow cash from them directly. The guarantor does not hand over money. Instead, they agree that the lender can use their property as additional security if you default.
This structure can be more useful than a family loan if your main goal is to avoid LMI or reach a higher loan amount. The guarantor's involvement does not create a separate debt you need to service each month, so your borrowing capacity is not reduced. You service only the mortgage itself.
Guarantor arrangements require independent legal and financial advice for the guarantor, and the guarantor's property must have sufficient equity to support the guarantee. Most lenders allow you to release the guarantor once you reach 80% LVR, either through repayments or property value growth, without refinancing the entire loan.
What Happens If You Can't Repay the Family Loan
If you fall behind on the family loan repayments, the family member has the same legal rights as any other creditor. They can pursue the debt through court and, if successful, obtain a judgment that affects your credit file and your ability to refinance or borrow in future.
Most families do not pursue legal action, but the potential for dispute is the reason lenders require the agreement to be formal. A signed contract protects both parties by making the terms clear from the outset. If circumstances change and you need to renegotiate the repayment schedule, document the change in writing and provide the updated agreement to your lender if you are refinancing or applying for another loan.
If the family loan is documented as repayable on sale only and you sell the property, the family member is repaid from the sale proceeds before you receive any remaining equity. This is a straightforward arrangement but does mean you may walk away with less than expected if property values have not increased or if you sell within a short period and incur selling costs.
How to Present the Family Loan to Your Lender
Provide the signed loan agreement, a statutory declaration from the family member confirming the loan terms, and evidence of the funds being transferred into your account. The lender will also want to see bank statements showing your genuine savings separate from the borrowed amount.
If the family member has transferred the funds more than three months before you apply for pre-approval, some lenders will treat the funds as savings rather than a loan, provided you can demonstrate you have been servicing the repayment obligation during that period. This can improve your application, but it requires clear documentation of both the transfer and the repayments made.
Be prepared for the lender to ask why the family loan is necessary and whether the family member has capacity to forgive the debt if required. These questions are part of responsible lending obligations under the National Consumer Credit Protection Act. The lender is assessing whether the loan structure is sustainable and whether you genuinely understand the commitment you are taking on.
Call one of our team or book an appointment at a time that works for you. We'll walk through your deposit structure, compare the impact of a family loan against a guarantor arrangement or a longer savings period, and identify which lenders will accept your specific loan agreement terms without adding unnecessary hurdles to your application.
Frequently Asked Questions
Does a family loan reduce my borrowing capacity?
Yes, a family loan reduces your borrowing capacity because the repayment obligation counts as a debt. Lenders assess whether you can service both the home loan and the family loan, even if the family loan charges no interest.
Can I use a family loan with the Australian Government 5% Deposit Scheme?
No, the 5% Deposit Scheme requires your deposit to come from genuine savings or a gift. A loan from a family member does not qualify as genuine savings under Housing Australia's scheme rules.
What must be included in a family loan agreement for lenders to accept it?
The agreement must include the loan amount, repayment schedule, interest rate (which can be zero), loan term, and signatures from both parties. Vague or informal arrangements will not be accepted.
Is a guarantor arrangement better than a family loan?
A guarantor arrangement can be better if your goal is to avoid LMI or increase your loan amount, because it does not create a separate debt that reduces your borrowing capacity. The guarantor uses equity in their property as security rather than lending you cash.
What happens if I misrepresent a family loan as a gift?
Misrepresenting a loan as a gift is mortgage fraud and can result in the loan being called in, legal action, and potential criminal prosecution under the National Consumer Credit Protection Act.
