When a property is for sale, you can submit an offer of purchase in which you may choose to include a ‘subject to finance’ clause.
This means the sale can only proceed when your lender approves your home loan. If the loan is not approved, you are not legally tied to the sale and can walk away without losing money.
This is important to know, as a subject to finance clause can protect you from being legally obligated to go through with a purchase when you don’t have the financing to do so.
How does a subject to finance clause work?
Most Australians will require a home loan to buy a property. You also will usually be required to provide 20% of the property’s value in the form of a deposit. Your lender will then provide the remaining 80% needed to buy the property, which you pay back with interest.
A subject to finance clause is a safety net for buyers. This clause is vital because if your lender denies your home loan for any reason, you are legally able to cancel the sale of the property.
The subject to finance clause is included in the contract of sale, which is prepared by a conveyancer, solicitor or real estate agent. Buyers should communicate with their legal representation that they require one in the contract.
Example of a subject to finance clause
Each subject to finance clause will be slightly different. However, it is important to include key information and always be specific. Vague information or unclear terminology can lead to complications down the track. Make sure you specify:
- What lender you have applied for a mortgage with
- What specific loan you have applied for and the specific interest rate
- The mortgage term
- The approval date.
When you include a subject to finance clause, it’s important to include a date that leaves enough time for your lender to approve your loan. For example, if they need 14 days to assess your loan application, don’t put the approval date in your clause as seven days. This helps you avoid dragging out the process or being held liable for an extended period of time.
Why include a ‘subject to finance’ clause?
In simple terms, including a subject to finance clause protects you as a buyer from being legally responsible for buying a property you can’t afford.
If you do not include one and your lender denies your home loan application, you’ll face certain risks. These include losing your deposit or being forced to shop around and accept a loan from another lender — usually with a higher interest rate and worse conditions.
If you include one and your home loan application is denied, you can at least back out of the sale legally. That way, you can continue looking for a property you can afford.
Are subject to finance clauses always included?
Subject to finance clauses are not automatically included in Australia. You’ll need to speak to your solicitor/conveyancer about including the clause in the contract of sale if need be, though you should always discuss it with them first.
The seller also will have to agree to the clause when negotiating your offer. You should also note that properties sold at auction are ‘unconditional’ sales, meaning they aren’t typically subject to financing.
Pre-approval vs. subject to finance
Prospective homebuyers often have some common misconceptions about how subject to finance clauses differ from pre-approval.
Pre-approval involves going to a lender who assesses your finances and lets you know how much you can borrow for your mortgage. This is very helpful when putting in an offer as you can show the seller you have pre-approval up to a certain amount.
However, this does not mean you shouldn’t include a subject to finance clause in your contract of sale. Pre-approval with many lenders only lasts for up to 90 days. If your contract of sale is submitted after this timeframe, you will likely need to apply for a new home loan and your financial situation may be assessed differently.
Additionally, your situation may change within this 90-day period, which can also affect your ability to secure a home loan. You may need to use some of your savings for unforeseen expenses like legal fees (solicitor, conveyancer, etc.) or other expenses unrelated to your property search, like medical fees or car repairs.
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