Using a Family Loan to Buy a House: What You Need to Know
It’s a familiar story across the Sunshine Coast and throughout Queensland: the property market is competitive, and a little financial help from family—often referred to as the ‘Bank of Mum and Dad’—can help a first-home buyer or anyone needing a property upgrade.
Whether it’s a generous gift or a structured loan, bringing family money into a property transaction requires careful consideration. Mixing family love with legal contracts can get complicated quickly if you don’t formalise the arrangement. The consequences of a “handshake agreement” can be dire, especially in the event of a relationship breakdown, bankruptcy, or death. So, if you are using a personal loan from a relative for a house deposit, you must treat it like the serious financial transaction it is.
At Bradley & Bray, we understand the legal aspects and emotional layer involved in lending money to family. Here is what you need to know to protect both the borrower and the lender when using a family loan to buy property in Queensland.
Why the Difference Between a Loan and a Gift Is Important
The most important starting point is establishing the true nature of the funds: Is the money a loan (intended to be repaid) or a gift (no repayment expected)?
1. The Bank’s Perspective
When you seek finance from a traditional lender for your mortgage, they will require a letter or declaration from a family member stating whether the funds are a gift or a loan.
If it’s a gift: The bank views this positively, as it strengthens your deposit and reduces your overall debt-to-income ratio.
If it’s a loan: The bank must factor in the scheduled repayments of the family loan as part of your existing liabilities when assessing your serviceability for the main mortgage.
2. The Family Law Perspective
This is arguably the greatest risk for the borrower. In the unfortunate event of a separation or divorce, funds provided by parents are often presumed by the court to be an advance on an inheritance (a gift) unless there is clear documentation proving it was a debt.
Without a formal contract, the funds might be split between the two parties and added to the shared asset pool, giving the lending family member no legal way to recoup their investment. In contrast, a loan that has been properly secured and documented is regarded as a debt that needs to be paid back before the remaining assets are divided.
How Does a Family Loan Work Legally?
A family loan needs to be formalised to be recognised as a debt and be legally enforceable. To safeguard all parties, a formal, written agreement is necessary.
The Essential Document: The Family Loan Contract
A lawyer should draft a formal family loan contract, also known as a loan agreement, which must specify all of the terms of the arrangement. This record is essential for demonstrating that the funds are a debt rather than a gift.
The contract should include:
Loan Amount and Purpose: The exact amount given, along with verification that it is being used to buy the particular property.
Repayment Schedule: Clear terms on how and when the funds will be paid back (e.g., monthly payments, lump sum upon house sale, or deferred repayment).
Interest: Whether interest will be charged (even a zero-interest loan must be clearly stated).
Default Provisions: What happens if the borrower misses payments?
Term: How long the loan will last.
Securing the Family Loan in Queensland
While a simple written contract is a good start, the strongest protection for the lender is securing the loan against the property itself. If the borrower experiences significant financial difficulties (such as bankruptcy), this guarantees that the loan will be paid back first, before unsecured creditors.
There are two primary methods for securing the loan in Queensland property transactions:
1. Registering a Second Mortgage
The lending family member may register a second mortgage on the title if the property already has a bank mortgage (the “first” mortgage).
Key Consideration: The bank, the first mortgagee, must agree to the second mortgage’s registration. The family lender is ranked second in priority for repayment in this intricate process, which means that if the property is sold due to default, the bank will receive full payment first.
2. Lodging a Caveat
A caveat is a notice registered on the property title that tells the world a third party (the family lender) claims a legal interest in the property.
Key Consideration: The loan agreement must specifically grant the family lender the right to lodge a caveat. A caveat generally prevents the owner from selling or further mortgaging the property without first addressing the family member’s interest. It is a powerful tool to prevent the borrower from disposing of the asset without notifying the lender.
The Role of Independent Legal Advice
For any significant family loan arrangement, both the borrower and the lender must receive independent legal advice.
This means each party speaks to their own lawyer, ensuring they fully understand the risks, terms, and consequences of the arrangement before the money is transferred. This step is particularly important for the lender, who is taking on the risk, and for the borrower, who may be asked to grant security over their home.
At Bradley & Bray, our property lawyers on the Sunshine Coast are experienced in drafting robust family loan contracts and navigating the nuances of securing interests in Queensland property. We ensure your family arrangement is both legally sound and tailored to your personal goals.
Let Us Help Formalise Your Family Loan
Protecting your finances is just as important as maintaining family harmony. Don’t rely on trust alone when a written, legally binding document is the only true form of protection.
Contact Bradley & Bray today. We offer the professional and intentional legal services you need to secure your property purchase on the Sunshine Coast or across Queensland using a family loan.
Disclaimer: This article is general in nature and does not constitute legal advice. If you require legal advice in relation to your personal circumstances, you must formally engage our firm or another firm to provide legal advice in relation to your matter. Bradley & Bray lawyers take no responsibility for any use of the information provided in this article.
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