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.
Download the LPLC Client Brochure — Parent to Child Property LoansHelping 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 Six Pillars of a Protected Loan
Independent Legal Advice
Your solicitor acts for you only — not for your child or their partner. Before any documents are signed, your child should obtain independent legal advice from a separate solicitor. If they decline, they must sign a written waiver confirming they were advised to seek independent advice and chose not to. This step protects you, your solicitor, and the integrity of the entire arrangement. It is also the first thing the LPLC and any future court will look for.
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. The loan must be secured by a registered or registrable mortgage.
Security on Title
A registered mortgage is the strongest form of security, giving you a statutory 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 — held unregistered. A caveat is then lodged on title to evidence that mortgage interest and to prevent any further dealings without your knowledge. The executed but unregistered mortgage preserves your right to register later (for example, when the first mortgage is discharged).
Active Enforcement & Renewal
The loan must be treated as a genuine commercial debt throughout its life — this is the lesson of Han & Han [2026]. 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 promptly. If the loan term expires without repayment, do not let the agreement lapse: enter into a new Deed of Loan and obtain a written acknowledgment of the debt, which also restarts the limitation period. A dormant or expired loan will be treated by the Family Court as a gift regardless of the security held.
Binding Financial Agreement — The Absolute Gold Standard
A Binding Financial Agreement (BFA) under Part VIIIA of the Family Law Act 1975 (Cth) is the strongest available protection against the family law risk. It is an agreement between your child and their partner that acknowledges the parental loan as a genuine debt and agrees it will be treated as a liability in any future property settlement. Both parties must obtain independent legal advice before signing. The BFA must be executed before or at the commencement of the relationship (s 90B) or during the relationship (s 90C). Combined with a Deed and mortgage, a BFA represents the absolute gold standard for BOMD loan protection.
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. If you die before the loan is repaid, your executor has a duty to call in the debt — ensure they are aware of the arrangement.
Can a Declaration of Trust Help?
In some circumstances, an express Declaration of Trust can provide a layer of protection that a loan agreement alone cannot. Rather than lending money to your child, you retain a defined beneficial interest in the property itself — proportionate to your contribution as a fraction of the purchase price. Your child holds legal title, but you hold a vested equitable interest in the property.
The key advantage is that a beneficial interest is proprietary, not merely contractual. The Family Court cannot disregard a proprietary interest in the same way it can disregard a debt. On sale, your share of the proceeds flows to you as a beneficial owner — not as a creditor seeking repayment of a loan. This sidesteps the Han & Han enforcement problem entirely.
Advantages
- Proprietary interest — not subject to s 79 disregard in the same way as a debt
- No need to 'enforce' — you own a share, not a claim
- Priority on sale proceeds as beneficial owner
- Survives the child's bankruptcy as a trust interest
- Can be combined with a Deed of Loan and BFA for maximum protection
Limitations & Risks
- Stamp duty: a declaration of trust over land attracts duty at the same rate as a land transfer under the Duties Act 2000 (Vic) — specialist advice required
- Land tax: a fixed trust may attract trust surcharge rates unless beneficial interests are notified to the SRO
- The child's bank must be informed — lenders may object to a third-party beneficial interest
- A caveat should be lodged to protect the beneficial interest on title
- Not suitable for all arrangements — specialist advice essential
The most robust structure combines all four elements: a Deed of Loan + executed Mortgage (registered or held unregistered with caveat) + Binding Financial Agreement + Declaration of Trust (where appropriate). Each element protects a different aspect of your position. Speak with Hayton Kosky Lawyers about which combination is right for your circumstances.
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.
Important Disclaimer
Hayton Kosky does not provide advice on family law matters. The information on this page is general in nature and is intended to help you understand the risks. If a Binding Financial Agreement (BFA) is considered a requirement of the loan arrangement, your child and their partner will each need to seek independent advice from a qualified family law specialist before signing.
LPLC Resource
The Legal Practitioners' Liability Committee (LPLC) publishes a free client brochure specifically for parents considering a property loan to their child. It covers the key risks, what to ask your solicitor, and what documentation you should expect.
Read the LPLC Client BrochureFrequently 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