'Subject to finance' clause: What is it and why is it important?
Imagine saving up a hefty deposit to put down on your dream home, only to lose it because you couldn't secure a loan. This is where the trusty 'subject to finance' clause can come in handy.
What is a subject to finance clause?
A contract subject to finance can be pretty much standard in many real estate transactions. The clause effectively means the sale is conditional on the buyer obtaining finance by the date stated in the contract.
In effect, if you're the buyer, it gives you time to get a loan approval from a preferred lender for the property you want to purchase. It also means you can back out of the contract if your loan application is turned down and, generally, have your deposit returned in full. (See more on risks to this below.)
Why using a subject to finance clause can be useful
Using a subject to finance clause can be helpful in all property purchases where a buyer requires a loan.
Even if you have pre-approval for a home loan, it's wise to insert a subject to finance clause in a property contract. Once the property is under contract, you will need to apply for formal approval which is not guaranteed even if you've been pre-approved for a loan.
The table below features competitive home loans from lenders who offer pre-approval.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.80% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
6.04% p.a. | 6.07% p.a. | $3,011 | Principal & Interest | Variable | $0 | $799 | 80% |
If your home loan application is rejected, without the safety net of a subject to finance clause, you could end up with no choice but to have to proceed with the purchase regardless. With no financial means to do this, you stand to lose your deposit - and potentially face legal action if the house eventually sells for less than what you'd originally offered.
Bear in mind, when you have a subject to finance clause in a property contract, you are obliged to make a genuine effort to obtain finance rather than use it as a 'get out of jail free' card should you simply change your mind. In worst-case scenarios, if any dispute arises with the seller, you may need to produce evidence that you genuinely tried to get finance in good faith or risk losing your deposit.
How do I make my contract subject to finance?
It's strongly recommended you get your solicitor or conveyancer to look over any contract before you sign it. They will ensure a subject to finance clause follows correct legal requirements and serves your best interests.
Standard real estate contracts have provisions for finance conditions to be inserted - they are not automatic. These will differ slightly according to the state or territory you're purchasing in, but generally you will need to state the finance amount, the name of the lender, and the date for finance to be finalised. It's important all three of these variables are covered.
The seller of the property will also need to agree to having the clause added to the contract. Bear in mind, contracts for homes sold at auction won't give you a subject to finance option. They are typically unconditional contracts.
Conditional vs unconditional property contracts
A contract of sale signed with conditions essentially means those conditions must be met before the sale is 'unconditional'. Conditions may benefit either party and generally can be subject to negotiation between the buyer and seller.
In the case of subject to finance clauses, a buyer may ask the seller for more time to secure finance or get the go-ahead to apply with another lender if they are rejected by their original option. Either party can choose to opt out of the sale if stated conditions aren't met.
On the other hand, unconditional contracts are not contingent on conditions and, as a result, become legally binding once they're signed. (This also depends on laws surrounding cooling-off periods in each Australian state and territory.)
Are there any pitfalls of subject to finance clauses?
Some real estate agents will have you believe that making a contract subject to finance will put you at a disadvantage in securing a property.
That said, you need to be prepared that some sellers may not agree to you inserting a subject to finance clause in a contract. This can sometimes be the case in competitive property markets where there is a lot of interest in the property, or where a seller is keen for a quick sale.
But even if a seller may be more motivated to accept a contract without added conditions, you need to weigh up the risk of a contract going unconditional the moment you sign it.
Be wary of agents giving advice about contract conditions. They may not always have your best interests at heart. It's always best to seek advice from your own legal professional to ensure conditions inserted in the contract serve your best interests.
Pros and Cons of contracts 'subject to finance'
Pros
- Allows a buyer to withdraw from the contract without penalty if they fail to get finance approved and have their deposit returned
- It can give the buyer additional time to submit a home loan application with their preferred lender
- It may lend the buyer some flexibility in negotiating changes to the condition if required
- It provides a safety net against potential financial loss if the buyer is unable to come up enough funds to purchase the property at the agreed price
Cons
- Some sellers may be less willing to accept contracts with a 'subject to finance' clause as it provides less certainty the sale will proceed
- Sellers may try to negotiate a shorter time period or higher sale price in negotiations over a subject to finance clause
- Creates the possibility the seller may choose to sell to another buyer if there is a delay in getting finance approved
Savings.com.au's two cents
All things considered, a 'subject to finance' clause can provide buyers with a way to back out of a contract should they be unable to secure finance. This can provide valuable peace of mind during what can be a stressful process.
Always seek the advice of your own legal representative to ensure a subject to finance clause is properly inserted to suit your specific circumstances and represents your best interests.