A family loan contract is the document that turns “Mum and Dad are helping” into a financial arrangement a mortgage lender can assess, a solicitor can record and a court can enforce. Get it right and family money becomes a clean, powerful part of a property purchase. Get it wrong and it can cost a mortgage offer, a tax bill, or a relationship.
We arrange mortgages for buyers across South West London every week, and family money is involved in a large share of them. The same six mistakes appear again and again. This guide explains each one, why it matters to a lender, and how to fix it before it becomes a problem.
What a family loan contract has to do
A good family loan contract answers five questions without ambiguity: who is lending to whom, how much, at what interest rate, on what repayment schedule, and what happens if a payment is missed. Everything else is detail. If any of those five is missing or vague, the document will fail the two audiences it exists for.
The first audience is the mortgage lender. If the loan is going towards a deposit, the underwriter needs to know it is a loan, what the repayments are, and that the terms are fixed. The second audience is a court, should the loan ever be disputed. The commonest defence in a family loan dispute is that the money was a gift, and a signed contract with a schedule and a payment record is what defeats it.
Mistake 1: Calling it a gift when it is a loan
This is the most serious mistake and the most common. A buyer tells the lender the deposit is a gift because gifts are easier to place, while privately agreeing to repay it. That is a misrepresentation on a mortgage application. If it surfaces, and it often does when bank statements show regular transfers back to a parent, the lender can withdraw the offer or, after completion, treat it as a breach of the mortgage conditions.
The fix is simple: decide honestly whether the money is a gift or a loan, document it as what it is, and tell your broker. A properly documented loan can be placed with the right lender. A fictional gift cannot be rescued once discovered.
Mistake 2: No repayment schedule
A family loan contract without a repayment schedule is barely a loan at all. Lenders cannot assess affordability against “whenever you can”, and a court will struggle to find a breach when no payment was ever actually due.
Set the amount, frequency, first payment date and final payment date. If the plan is to repay in a lump sum on a remortgage or sale, say so and put a long-stop date on it. Where a loan is towards a deposit, be aware that a shorter repayment term means higher monthly repayments in the affordability calculation, so the schedule and the mortgage need to be designed together.
Mistake 3: Leaving interest unstated
Most family loans are interest-free, and that is fine. The mistake is not saying so. A contract silent on interest invites a later argument about what was intended. State the rate explicitly, even if it is 0%.
If interest is charged, two things follow. The lender in the family will generally have taxable savings income to report to HMRC, and the loan may attract more scrutiny from a mortgage underwriter because the repayments are higher. Neither is a reason to avoid interest; both are reasons to document it properly.
Mistake 4: Ignoring the tax and estate position
A loan and a gift are treated differently for inheritance tax. An outstanding loan remains an asset of the lender’s estate, payable to the executors, whereas a gift may fall outside the estate after seven years. Families who intend the money to be a gift eventually, but call it a loan now, can end up with the worst of both: a repayable debt for the borrower and an asset in the estate for the lender.
The family loan contract should reflect the real intention. If the plan is to forgive the loan later, take advice on how and when, because forgiveness is itself a gift with its own consequences.
Mistake 5: No record after signing
A signed contract with no record of what happened next is a document about the past, not a loan. Three years in, nobody can say what has been paid, what is outstanding, or whether the borrower is ahead or behind. That is when disputes start, and it is also when a lender’s request for evidence of the balance becomes impossible to meet.
This is where a purpose-built tool earns its keep. Chipkie gives both parties a shared dashboard, an agreed schedule, payment logging that the lender confirms, and automatic reminders, all on the free tier. The how Chipkie works page shows the full process. The one-off £3.95 Loan Contract upgrade adds a signed PDF family loan contract stored alongside the payment record, a full amortisation schedule, quarterly loan statements, tax-ready annual summaries in PDF and CSV, and a court-ready evidence pack with the signed agreement, receipts and audit history.
Mistake 6: Never enforcing the terms you agreed
Courts are wary of lenders who agreed a schedule and then ignored it for years. If payments stop and the family lender says nothing, the borrower can later argue the terms were varied or waived. The contract should allow for repayment holidays and variations, but those changes must be agreed in writing, not by silence.
In practice this means a short, friendly note when a payment is missed and a written record of any agreed change. Automated reminders that escalate gently do this without anyone having to have an awkward conversation.
How a family loan contract affects the mortgage
Tell your broker at the outset that a family loan contract is part of the funding. Lender appetite varies enormously: some mainstream lenders will not accept a repayable loan as a deposit source at all, while specialist lenders and private banks often will, provided the loan is documented and the affordability still works with the repayments included.
Where the loan is for costs rather than the deposit, such as stamp duty or legal fees, lenders are generally less concerned, but the repayments still count. And if the family would rather keep their capital intact than lend it, a family deposit mortgage, where savings are held as security rather than transferred, may be a better fit.
Family loan contract: quick answers
Is a family loan contract legally binding in England and Wales?
Yes, provided it is clear on the parties, the sum, the repayment terms and is signed by both. A simple signed contract is enforceable for six years from a breach; signing it as a deed with a witness extends that to twelve.
Does it need a solicitor?
Not for a straightforward unsecured loan. If the loan is to be secured on the property, or the sums are large relative to the lender’s estate, take legal advice.
Can the contract be changed later?
Yes, if both parties agree the change in writing. Undocumented changes are exactly what the contract is meant to prevent.
Will the mortgage lender want to see it?
If the loan is towards the deposit, almost certainly, along with evidence of where the funds came from.
The short version
Decide honestly whether it is a gift or a loan. Write down the amount, rate, schedule and default terms. Sign it. Keep a record both sides can see. Enforce it gently but consistently. Tell your broker the truth. Six habits, six mistakes avoided, and a family loan contract that helps the purchase rather than hindering it.
If family money is part of your plan to buy in London, get in touch early. The way the loan is structured will shape which lenders we approach, and it is far easier to get right before the application than after.
