In Australia, it’s not uncommon for parents to lend money to their adult children to help them purchase property. With skyrocketing house prices and a fiercely competitive real estate market, many first-home buyers rely on the “Bank of Mum and Dad” to secure their first step onto the property ladder.
While such arrangements often come from a place of generosity and trust, problems can arise when the terms of the loan are not formally documented. The emotional complexities of family relationships can make legal disputes particularly painful, not to mention financially devastating.
Why Formalising Family Loans Matters
1. Preventing Disputes and Misunderstandings
When large sums of money are exchanged, memories can be short or faulty, and expectations can differ. Was the money a gift or a loan? Is there an expectation of repayment? If so, when and under what terms?
A written agreement clearly outlines:
- The amount loaned
- Repayment terms and interest (if any)
- Security over the property (if applicable)
- What happens if the borrower cannot repay the loan
- What happens if the borrower separates from an intimate partner or the property is sold
Having these terms in writing can help prevent future disputes and keep relationships intact.
2. Protecting the Lender’s Interests
Without a formal agreement, a parent who lends money has little legal protection if the borrower defaults. Worse, if the child’s intimate relationship breaks down and they separate from a partner, the family loan could become part of the pool of assets divided between the separating parties, this can be so even if the parent intended for the money to benefit only their child.
A properly drafted loan agreement can include provisions to:
- Secure the loan with a mortgage over the property
- Stipulate how the loan is to be treated in the event of separation or divorce
- Ensure repayment upon the sale of the property
- Allow for interest, if required
3. Estate Planning Considerations
A family loan can complicate your estate planning if it’s not formalised. For example, if one child receives a loan and the others do not, your will could be challenged on the grounds of unequal treatment. A documented loan helps ensure clarity and fairness in your broader financial and family planning.
4. Tax and Centrelink Implications
The treatment of a family loan can have implications for tax or social security entitlements, especially for older parents. Centrelink may treat a “gift” differently from a “loan”, potentially affecting eligibility for the Age Pension or other benefits. A properly structured and documented loan helps demonstrate that the money is not a gift and may avoid unintended financial consequences.
What Makes a Loan Agreement Legally Binding?
To be enforceable, a family loan agreement should:
- Be in writing
- Be signed by both parties
- Set out clear terms, including interest and repayment obligations
- Include a clause stating the agreement is legally binding
- Ideally, be reviewed or drafted by a lawyer
If security is being provided, such as a mortgage over the property, the agreement should also be registered appropriately with the relevant state or territory land titles office.
Don’t Rely on Goodwill Alone
Family dynamics can change over time. Relationships may sour, circumstances may shift, or people may simply forget the original terms of the arrangement. A handshake deal or casual email trail may not be enough to protect your interests.
By formalising family loans through a legally binding agreement, you reduce the risk of confusion, conflict and costly legal battles down the track.
Get Legal Advice
Whether you’re the parent loaning the money, or the child receiving it, it’s wise for both parties to seek independent legal advice. At Dowson Turco, we are committed to helping families structure fair and enforceable loan agreements, agreements that support their financial goals, without jeopardising their relationships.
If you’re thinking about lending or borrowing money within the family, especially for something as significant as buying property, please don’t hesitate to reach out to us. We’ll help you protect what matters most.
