Protecting Your Investment
How to structure, document, and secure a loan to your child — and protect it if circumstances change.
Critical warning: A parent-to-child loan that is not documented, secured, and actively enforced as a genuine loan arrangement may be disregarded entirely in a family law property settlement. The Family Court has broad discretion to treat an unenforced loan as a gift.
Helping your child buy their first home is one of the most generous things you can do. But without the right legal structure, your money is at risk. If your child's relationship breaks down, if they face bankruptcy, or if they die before you, an undocumented or unenforced advance may be lost entirely.
The good news is that with proper documentation, genuine security, and active enforcement, your loan can be fully protected. This guide explains what you need to do — and what happens if you do not.
The Five Pillars of a Protected Loan
Formal Loan Agreement
The advance must be documented in a formal loan agreement, executed as a Deed. A Deed provides a 15-year limitation period (versus 6 years for a simple contract) and is binding even without interest being charged. The agreement must specify the principal, repayment terms, interest (if any), and default provisions. All registered proprietors of the property should be named as borrowers.
Security on Title
A registered mortgage is the strongest form of security, giving you a power of sale if your child defaults. Where the bank holds a first mortgage and consent to a second mortgage is not available or practical, we will still draft and execute a mortgage over the property — however it will be held unregistered. A caveat is then lodged on title to evidence that mortgage interest and to prevent any further dealings with the property without your knowledge. The executed but unregistered mortgage preserves your right to register at a later time (for example, if the first mortgage is discharged), and the caveat provides immediate, visible protection on title.
Independent Legal Advice
Your solicitor should act for you only — not for your child as well. Your child should obtain independent legal advice before signing any loan documents. If they refuse, they should sign a written waiver acknowledging they were advised to seek independent advice. This protects both you and your solicitor.
Active Enforcement
This is the most critical and most overlooked step. The loan must be treated as a genuine commercial debt throughout its life. If the agreement provides for interest, charge it and collect it. If repayments are required, ensure they are made. If your child defaults, take enforcement action. A loan that sits dormant for years will be treated by the Family Court as a gift — even if it is documented and secured.
Renew Expired Agreements
If the loan term expires and your child has not repaid, do not simply let the old agreement lapse. Enter into a new loan agreement. Obtain a written acknowledgment of the debt from your child, which also restarts the limitation period. Allowing an agreement to expire without renewal weakens your legal position significantly.
Update Your Will
Review your Will to ensure it is consistent with the loan arrangement. Consider including a hotchpot or equalisation clause, which brings the outstanding loan balance into account when calculating your child-borrower's share of your estate. This ensures fairness between your children and prevents disputes after your death.
The Family Law Risk
The most significant risk to your loan arises if your child's marriage or de facto relationship breaks down. Under the Family Law Act 1975 (Cth), the Family Court has broad discretion to assess and deal with liabilities in property settlement proceedings.
The court will consider: the nature of the liability; the circumstances in which it was created; the closeness of the parties to the lender; and — critically — the likelihood of repayment being required. If the court concludes the loan is unlikely ever to be enforced, it will be disregarded as a liability, increasing the net asset pool available for division between your child and their partner.
Case Study — Han & Han [2026] FedCFamC1A 54
A husband alleged he had borrowed $1.8 million from his mother around 2003. By 2022 the total alleged debt was $4.66 million. The loan was documented, and a caveat had been lodged since 2007. However, no interest was demanded until 2019, no repayments were ever made, and no enforcement proceedings were commenced. The Full Court disregarded the entire liability. The court found it would be unjust to reduce the matrimonial asset pool by $4.66 million on the basis of a debt that was plainly never going to be enforced.
Note that the de facto relationship provisions of the Family Law Act apply to couples who have been together for at least two years, or who have a child together. Your loan is at risk not only if your child marries, but also if they enter any long-term de facto relationship.
Frequently Asked Questions
Ready to put the right documents in place?
This guide provides general legal information. For advice tailored to your specific circumstances — including drafting your loan agreement, registering your security, and protecting your investment if circumstances change — speak with Brett Hayton at Hayton Kosky Lawyers.
Established 1991 · Property, Commercial & Estate Planning · Bentleigh, Victoria