Cancelling a home loan agreement before settlement

Let's say you're well on your way to buying a home. You've found a property, the buyer has agreed to a price, and you've signed with a lender willing to give you a good deal on a home loan. Everything is proceeding nicely, until something changes.

Maybe you’re not sure if your home loan is the right fit for your circumstances or a new job offer has come up in a different location. These things happen. Or maybe the place isn’t quite right for you after all. Perhaps the timing is a bit off. Whatever the reason, you've decided to cancel your home loan agreement. But where do you stand? What comes next?

Are you in a cooling-off period?

First up, most states and territories have a cooling-off period that applies to the signing of a private residential property contract (not a home loan agreement). It is a window of time that allows you to withdraw from a property sale and contract. If you’ve got cold feet on the sale or your circumstances change, inform the agent, or the seller, as soon as possible. Also let your home lender, solicitor, or conveyancer know at the same time. A home loan agreement can’t go ahead if you’re no longer buying the property.

Even in the cooling-off period, you may still be up for some form of penalty, generally 0.2-0.25% of the contract amount, depending on the jurisdiction, but cooling-off periods are built into the home-buying process in most states and territories. The length of the cooling-off period is different for every jurisdiction, and some don’t have them.

State or territory	Cooling-off period*
New South Wales	5 business days
Victoria	3 business days
Queensland	5 business days
Western Australia	No mandatory cooling-off period, but buyers and sellers can add one to a contract.
South Australia	2 business days
Tasmania	No cooling-off period. Once the contract is signed, both parties are bound.
Australian Capital Territory	5 business days
Northern Territory	4 business days

* Correct as at 1 May 2024

Cooling-off periods generally commence the same day the buyer signs the contract and ends at 5pm on the final business day of the stated period. If you are thinking of pulling out of your purchase altogether, it pays to be aware of mandated cooling-off periods (or whether one applies) and try to make your call within that time. It’s also worth noting here that not all property sales come with a built-in cooling-off period. The most notable exceptions are properties bought at auction.

How to cancel your home loan agreement

Now that we’ve established the bounds for pulling out of a residential property contract, the rules are different for pulling out of a home loan agreement. Before settlement of the property, you are within your rights to cancel a home loan agreement. Settlement is the last step in the home buying process. It’s when your lender hands over the funds for you to purchase the property and registers the mortgage against the title of your new home.

Before that happens, you can pull out of your home loan. It doesn’t mean you will avoid penalties, but at this stage, it’s still possible to withdraw. However, there are some steps you should take to ensure the process goes smoothly.

Call your lender

Phone your lender as soon as possible. Tell them over the phone that you would like to cancel the home loan agreement. You will likely have to provide a reason for doing so, so make sure you have one at hand. Your lender can provide some insights about the issue that has arisen, as well as outline any financial penalties you may have incurred, depending on how far along in the process you are.

Once the phone call is made, make a note of the date and time you rang and who you spoke to. As you’ll be aware, being organised is a major part of the home-buying process and it will help you here as well.

It’s worth going through your home loan agreement yourself to check for any penalties and breach of contract clauses. If you’ve got a solicitor or conveyancer helping you with the legals for the sale, contact them to let them know of your decision as well. They will be able to give you more information about your individual circumstances and your options.

Put it in writing

Next, ask to cancel your loan agreement in writing. Your letter should be a formal request to cancel your home loan agreement, dated and signed. You can email, fax, or hand-deliver it but make sure you make copies of the letter and keep these for your records.

When the lender receives the letter, the mortgage process will be stopped. Depending on the length of time after the agreement was reached and its terms and conditions, you may be able to recoup some of the fees associated with the loan. Be advised, though, that you may also be in breach of the contract and could forfeit them as well as be liable for additional penalties. This is where it is advisable to go through your home loan agreement carefully yourself or consult your solicitor who can help you understand any penalties that will apply.

Contingencies for termination

Every contract has a contingency for termination. In basic terms, a contingency is a condition that must be met before a contract can proceed. Home loan agreements and purchasing agreements are no different. If you want to proceed with buying the property, but with a different lender or no lender at all – let's say you inherited some money unexpectedly and no longer need to take out a loan – check your home loan agreement for contingencies.

But if you have decided against buying a specific property, you need to check the purchase agreement. Remember, these are two different contracts with their own termination clauses and each needs to be dealt with separately, depending on your situation. Let’s check some possibilities that may be built into your home loan agreement.

Offer lapse date

When it comes to your home loan, if you have not yet signed and returned the original loan offer, look for an offer lapse date. This marks the time period outlined in the home loan agreement in which the contract must be signed and returned to the bank before the agreement expires. Typically, this period will last between 30 and 45 days but can differ between lenders.

Appraisal contingency

Another common contingency in a home loan contract is an appraisal contingency. Imagine you secure a home loan for $450,000 on a property that you are agreeing to buy for $525,000. Now imagine that, upon appraisal, the property is only worth $425,000. You definitely don't need a loan for $75,000 more than the property value and most home loan agreements will have language in place to protect you from taking out significantly more than you need to borrow. Many lenders will also choose not to proceed with the loan if a property valuation comes in much lower than the purchase price and the loan amount you were asking for.

Change in circumstances

Other standard home loan contingencies have to do with your employment, your credit report, and the lender's analysis of your financial situation – that's how they approve you for the loan in the first place. If you're looking to cancel a home loan agreement because of a change of job or because you have recently come into some significant debt that appeared after you were approved for the loan, it's possible that you may no longer be eligible for it. This may even be one of the reasons you’re trying to pull out of it.

In all cases, be sure to call your lender and explain the situation. Everyone's reasons and circumstances are unique and making sure you discuss your specifics with your lender is the best way to understand exactly what your options are.

Will cancelling my home loan affect my credit score?

Every lender’s policies and procedures are different and this can also depend on the stage your loan agreement is at. Generally, when you apply for a loan, the lender will access your credit report in their assessment process. In the credit world, this is called a ‘hard inquiry’. Each hard inquiry slightly lowers your credit score but the impact is typically short term. Its effect with generally diminish after a few months.

What if it’s too late to cancel my home loan agreement?

Simply put, you cannot cancel a home loan after receiving the money for it. However, you can get out of the loan if you refinance with another lender or sell the property. If settlement has taken place and you are now the owner of the property and finding it difficult to make your loan repayments for whatever reason, contact your lender as soon as possible. All lenders are required to have hardship teams to assist customers facing financial difficulty. Your lender's hardship team can arrange for you to either:

• pause your repayments for an agreed period

• pay a reduced amount

• vary your loan terms

It is important you take action yourself before your lender issues a default notice on your home loan. You can still apply for a hardship variation if you have been issued a default notice, but it is best to get in beforehand.

Top tips for cancelling your home loan

• Let your lender know as soon as possible

• Make and keep records of any telephone conversations and written correspondence with your lender

• Keep the channels of communication open

• Familiarise yourself with the terms and conditions of your loan to understand what penalties may apply

• Seek legal advice if needed

Image by Sander Sammy on Unsplash

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