Nah you're not overreacting. My friends, a couple, had a similar deal with their parents (his parents): they'll chip in $1m, while my mates had the other $700k from their savings/first home buyer scheme, with the stipulation that the parents have a place to stay when they come over from Vietnam or Perth. Except, they didn't force my mates to not use the space when the parents aren't there.
What I'm pointing out is that you can be grateful for their help, and extremely disappointed and upset that they have this condition that wasn't explained to you.
Honestly, idk what I'd do. Part of me would want to be like "well keep your money then" but also, in this housing market that's a hard thing to do. Ugh. What a clusterfuck, I'm so sorry you're in this position, I want to slap your parents (lightly, just a little bit).