Helping your child buy a home? A loan agreement can protect the money

Many parents help a child into their first home — a deposit, or sometimes the whole purchase — usually with the property in the child's name. It feels like a private family matter. But if that child later separates from a partner, the money can land squarely on the table in a property settlement, and the law's starting assumption may not be the one you would expect.

The law's default works against you

When parents advance money to a child, the courts begin from what is called a ‘presumption of advancement’ — in plain terms, they presume the money was a gift, not a loan. If it is treated as a gift, it falls into the couple's asset pool to be divided. Silence and informal family arrangements almost always read as a gift.

Gift or loan — why the difference is everything

A genuine loan is a debt. In a property settlement it comes off the top of the pool and is repaid before anything is divided — so the family money is returned, not shared. A gift stays in the pool; it counts as a contribution by your child, but the value itself is still up for division. The same dollars, a very different outcome.

What makes a loan actually hold up

Courts look at loans between family members with real scepticism, so the arrangement has to look and behave like a bank loan, not a favour:

• a written loan agreement stating the amount, any interest, and a clear repayment date or schedule;
• some genuine repayments actually being made;
• ideally, security over the property — a registered mortgage or a caveat;
• and, most importantly, it must be set up at the time of the advance. A ‘loan’ documented only once a relationship is in trouble will be seen for what it is and given little weight.

Mind the six-year trap

In NSW a simple contract debt can become unenforceable after six years. A loan with no due date risks being treated as statute-barred — and therefore not a real liability at all — so the agreement should specify when repayment falls due.

It isn't a prenup — but it pairs with one

The direct equivalent of a ‘prenup’ is a binding financial agreement between the couple, which sets out how their assets are divided if they separate. A parental loan does something narrower but complementary: it protects the family money that went into the home. Used together — a properly documented loan plus a binding financial agreement — they give a family the strongest position.

Get it right, from the start

The theme is simple: document it properly, at the outset, and get advice before the money changes hands. Done right, a loan agreement is a genuine layer of protection. Done as an afterthought, it rarely survives scrutiny.

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General information only, not legal advice. For advice on your circumstances, contact HT Law Services on (02) 9280 1548.