The Easiest Way to Structure a Family Loan Agreement

A family loan can help you buy sooner, but lenders will only count it toward your deposit if the loan is properly documented and meets specific criteria.

West Leederville buyers often turn to family for deposit help, particularly given the suburb's proximity to the city and Subiaco, where competition for character homes and newer townhouses pushes prices up quickly. If you're receiving money from parents or relatives, the structure of that arrangement determines whether it strengthens or weakens your home loan application.

What Makes a Family Loan Different from a Gift

Lenders treat family loans and gifts differently. A gift requires no repayment and adds directly to your genuine savings or deposit. A family loan is money you're obligated to repay, and that obligation affects your borrowing capacity. The distinction matters because lenders assess the loan repayment as part of your ongoing financial commitments, which reduces the amount they'll lend you. A written agreement clarifies the arrangement and prevents lenders from making assumptions that could limit your options.

Consider a buyer who receives $40,000 from parents to help with a deposit. Without a formal agreement, some lenders may treat this as a loan and apply a notional repayment of around 3% of the balance per year when calculating serviceability. That adds roughly $100 per month to your assessed commitments, which could reduce your borrowing capacity by $20,000 to $30,000 depending on the lender's assessment rate. With a written agreement stating the money is a gift, that reduction disappears entirely.

How to Document a Family Loan Agreement

A family loan agreement should include the loan amount, repayment terms, interest rate if any, and whether the loan is secured against the property. Most lenders will accept an unsecured family loan if the agreement states that repayments don't begin until after settlement or are deferred for a set period. This allows you to structure the loan so it doesn't impact your borrowing capacity during the application process.

The agreement doesn't need to be complex. A one-page document signed by both parties, dated, and witnessed is usually sufficient. Include the lender's name and address, the borrower's name, the loan amount, the repayment schedule, and any interest charged. If no interest applies, state that explicitly. If the loan is to be repaid only when you sell or refinance, include that condition. Keep a copy of the agreement and provide it to your broker when you apply.

When Family Loans Work Alongside the 5% Deposit Scheme

The Australian Government 5% Deposit Scheme allows eligible first home buyers to purchase with a 5% deposit, with Housing Australia guaranteeing up to 15% of the property value. Family loans can be used to reach the required 5% deposit, but the loan must be documented and the funds must be in your account long enough to meet the lender's genuine savings requirements. Most participating lenders want to see at least 5% of the purchase price held in your account for at least three months, though some accept gifted deposits without a savings history if the gift is declared and documented.

West Leederville falls within the Perth metropolitan area, where the property price cap is $850,000. If you're buying at or near that cap, a family loan of $30,000 to $40,000 combined with your own savings can get you to the 5% threshold without needing to wait years to build a larger deposit. The loan agreement should specify that repayments are manageable within your budget, or deferred, so the lender's serviceability assessment doesn't exclude you from the scheme.

Interest Rates and Tax Implications for Family Loans

Family loans can be structured as interest-free, low-interest, or market-rate loans. From the lender's perspective, an interest-free loan is acceptable as long as the agreement is clear. From a tax perspective, the ATO generally doesn't treat interest-free family loans as assessable income for the borrower or a deductible expense for the family member providing the funds, provided the arrangement is genuine and not part of a salary sacrifice or employment arrangement.

If your family member charges interest, they may need to declare that interest as income on their tax return. If the loan is secured against the property as a second mortgage, the interest you pay is not tax-deductible for an owner occupied home loan, but it would be deductible if the property were an investment. Most families keep things informal by either charging no interest or setting a nominal rate below the current variable rate, then documenting the arrangement in writing to satisfy the lender without creating unnecessary tax complications.

Security and Second Mortgages

Some family loans are secured by registering a second mortgage over the property. This gives the family member a legal claim if you default, but it also adds complexity. The primary lender must approve any second mortgage, and many lenders either refuse to allow them or limit your borrowing capacity further to account for the additional security interest. If you're applying under the 5% Deposit Scheme or another low-deposit program, a second mortgage will usually disqualify you because the scheme requires the participating lender to hold first ranking security.

An unsecured family loan avoids these issues entirely. The family member has no claim over the property, but the loan agreement still sets out the repayment terms and protects both parties if circumstances change. In our experience, unsecured agreements work better for most buyers because they keep the application process straightforward and don't trigger additional lender requirements.

Structuring Repayments Around Your Budget

Repayment terms should reflect what you can actually afford once you're making mortgage repayments. If your family loan agreement requires $500 per month in repayments and your mortgage repayment is $2,800 per month, the lender will assess your ability to service $3,300 per month in total housing costs. That might push you outside the lender's maximum debt-to-income ratio, particularly if you have other commitments like car loans or credit cards.

A better approach is to defer repayments for the first year or two, or structure them to begin only after you've built some equity in the property and improved your income. The agreement can specify that repayments start after a set period, or that the loan is repayable in full when you sell or refinance. Lenders will generally accept deferred repayment terms as long as the agreement is clear and signed, and they'll assess your serviceability based on your mortgage repayment alone during the deferral period.

Where Family Loans Fit in West Leederville's Market

West Leederville sits between the city and Subiaco, with Cambridge Street running through the suburb and providing access to cafes, medical centres, and the Cambridge Street Collective retail precinct. The housing stock includes a mix of character homes on larger blocks, particularly around Harrow Street and Pearson Street, and newer townhouses and apartments closer to the lake and the western edge of the suburb. Buyers are often drawn to the suburb for its walkability and proximity to the CBD, which keeps demand steady.

Family loans are common among buyers in this market because the entry price for a two-bedroom townhouse or apartment often sits above what a single income or younger couple can save for independently. A loan of $30,000 to $50,000 from parents can make the difference between waiting another two years or buying now and locking in a location that's unlikely to become more affordable. The key is structuring the loan so it supports your home loan application rather than undermining it.

Call one of our team or book an appointment at a time that works for you to discuss how a family loan agreement fits with your deposit strategy and which lenders will assess your situation most favourably.

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