Buying or selling a property is often the most complicated transaction a person will ever be involved with. A contract of sale can span many pages, and it’s normally recommended that a solicitor review all the fine print before you sign, for the protection of both buyer and seller.
One clause that often appears is ‘subject to finance’. While not compulsory, a subject to finance clause can prove invaluable, particularly if you’re buying. Here’s what to know.
Subject to finance meaning
A subject to finance clause means the terms of the contract are only binding if the buyer successfully gets the home loan they need.
Once both parties have signed the sale contract and the cooling off period has elapsed, the buyer has a legal obligation to follow through with the purchase. That means if they renege on the deal, the seller can keep their deposit and might be able to sue for further losses.
Without a subject to finance clause, a buyer who signs a contract and who later can’t get a loan will likely be in trouble.
By including a subject to finance clause, the buyer can walk away from the deal unscathed if their lender refuses to finance their purchase. To cancel the deal if rejected for finance, the buyer will usually need to provide some sort of evidence they made a genuine attempt to get hold of the loan – subject to finance isn’t a get out of jail free card if the buyer changes their mind.
Subject to finance clause details
The fine print of a subject to finance clause varies from contract to contract. As a buyer, you or your solicitor will need to take care in agreeing to the terms, ensuring you understand perfectly exactly what your obligations are.
These are some of the most common details these clauses might contain.
Time frame
A subject to finance clause will usually give the buyer a certain amount of time to try and obtain finance – usually between seven and 28 days.
If this time elapses and the buyer still hasn’t gotten a home loan, they can request an extension, but the seller doesn’t have to agree to it. If the seller thinks they can simply sell the property to another buyer, they can do so once the finance period elapses.
As a buyer, it’s a good idea to negotiate for the subject to finance period to cover the amount of time it will take for the lender to process the application, and then some.
If you're a buyer and you get approved for a home loan, it’s important to let the seller know within the specified timeframe.
Buyer obligations
Most subject to finance clauses require the buyer to take ‘all necessary steps’ to get finance approval.
What these steps might be normally depends on the wording of the contract.
For instance, in a Queensland case from 2013, the subject to finance clause specified ING as the lender the buyer would look to get a home loan from. However, the buyer, a Ms Miller, decided to apply with a different lender, and was turned down. She tried to cancel the contract because of this, but the court ruled that in not contacting ING, Ms Miller did not take ‘all reasonable steps’ to obtain approval.
What happens without a subject to finance clause
With no subject to finance clause, the contract of sale becomes legally binding once the cooling off period elapses.
The buyer then has an obligation to go ahead with the deal. If they can’t get the loan they need, the seller usually keeps the deposit. If the seller subsequently sells the property for less than the original price, they might also have grounds to initiate further legal action in order to recoup the difference.
This means, if you’re a buyer relying on a home loan, including a subject to finance clause can offer great protection from unforeseen problems down the line.
This applies even if you’ve received pre-approval from your preferred lender. Pre-approval is not the same as an actual written home loan. Your circumstances can change after you’re offered pre-approval, and lenders reserve the right to decline a home loan application, even if the borrower has been granted conditional approval.
The flip side is that a subject to finance clause typically pushes back the settlement date.
If a seller wants or needs to get the deal done as quickly as possible, they may choose to sell to an alternative buyer who is happy to proceed unconditionally. However this isn’t the norm – signing without a subject to finance clause generally isn’t super sensible, so most people prefer to include one.
If you’re confident you know enough about property contracts to have a crack at getting into the market, these are some of the top deals for owner occupier home loans in Australia.
If you’re confident you know enough about property contracts to have a crack at getting into the market, these are some of the top deals for owner occupier home loans in Australia.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.08% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% | 4.6 STAR CUSTOMER RATINGS |
| Promoted | Disclosure | |||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% |
| Disclosure | |||||||||||
6.14% p.a. | 6.16% p.a. | $3,043 | Principal & Interest | Variable | $0 | $350 | 60% |
Collections: Buying a home First Home Buyer
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