Informal Family Loans for Property — When a Caveat May Help and When It Creates More Risk

Family money is behind a significant number of first home purchases and upgrades in NSW. Parents and relatives help with deposits, duty and renovation costs. The intention is usually generous, but there is often an expectation somewhere in the background – repayment if circumstances change, or at least recognition if the property is sold. The trouble is that expectation is rarely written down.

A caveat can be one way to recognise and protect a family loan, but it is not always the right tool. At its core, a caveat tells the registry that the person lodging it claims some interest in the property. For that to be true in a family context, there should be a clear loan or other arrangement connecting the money to the property. Ideally, that is set out in a written loan agreement prepared at the time the funds are advanced.

If you are the person providing the money, a loan agreement can deal with amount, timing, interest (if any), and when repayment is expected. It can also state whether the loan is to be secured by a mortgage or caveat, and whether your consent is needed before the property is sold or refinanced. From there, lodging a caveat may be an option to reflect your interest until a formal mortgage is registered or until the loan is repaid.

From the borrower’s perspective, any security over the property – including a caveat – must be considered in light of their bank’s requirements. Many lenders want to know about all existing and proposed securities. Unapproved caveats can breach loan terms and complicate refinancing. That is why coordination is important: involve both your legal adviser and, where necessary, your broker or lender before registering a caveat.

Where problems usually arise is when these discussions never happened. Years later, after a falling out or a relationship breakdown, a parent may quickly lodge a caveat to “protect” what they believe is their stake. If there is no loan agreement, and little evidence beyond memories of conversations, the caveat can be challenged. The child and their partner might say the money was a gift. The lender might refuse to refinance while the caveat remains. Everyone ends up in a more expensive and strained position than if the arrangement had been documented properly at the start.

Consider a cautious alternative. Suppose you are parents planning to help a child purchase in Sydney with a significant sum. Instead of transferring money informally, you meet with a lawyer to explore your options. You might decide to:

• Enter a written loan agreement;

• Register a second mortgage or, in some cases, lodge a caveat; and

• Ensure the child’s lender is aware of, and comfortable with, the arrangement.

If later the child separates or wants to sell, your interest is on record. There is much less room for argument about whether your contribution should be recognised.

On the other hand, you might decide that the money is truly a gift and that no ongoing interest is intended. Recording that clearly can actually protect your child, because it reduces the scope for later disputes about whether you meant to retain a share.

In short, a caveat can be a useful part of securing a family loan – but only where it reflects a thoughtful, documented agreement. Used reactively in the middle of a dispute, it can escalate tensions and create new legal hurdles. A short planning conversation before the money leaves your account is almost always cheaper than a court dispute later.

Declaration: This article provides general information for NSW families considering loans or gifts towards property and is not legal advice. You should obtain advice on your specific arrangements before advancing funds or lodging any caveat.