Why is ‘subject to finance’ important?

It’s every homebuyer’s worst nightmare: You pay a deposit on a home, then struggle to get a loan. That’s when a subject to finance clause can save the day.

What does subject to finance mean?

A ‘subject to finance’ clause is often a standard condition in home purchase contracts of sale. As a buyer, it gives you the option to back out of the purchase and still get your deposit back, if you can’t secure a home loan.

A finance clause is quite different from a cooling off period. In most states (though not all), a cooling off period applies for private treaty sales. Auction sales don’t usually have any cooling off period.

As the name suggests, a cooling off period recognises that you may simply change your mind about a property. And while you could lose a small amount of your deposit (usually around 0.25%), you should certainly get the vast majority of your money back and avoid the full purchase price of the real estate.

A subject to finance clause works differently. You can bail out of the purchase only if you can’t pull together a home loan. So unless you are 100% sure your home loan is sewn up, ask your legal rep to check that the sale contract does indeed contain a finance clause.

If you are still in the early stages of buying a house or real estate property, you can increase your negotiating power by showing them you are a serious buyer with a home loan pre-approval.

Traps to avoid

Even with a subject to finance clause in place, there are still potential pitfalls.

Vague wording can be a trap. Ideally a clause should be specific about ‘subject to obtaining finance with satisfactory terms’.  Or you could go a step further and request that the clause be amended so that the purchase is subject to obtaining finance from your lender at an interest rate not higher than the rate you nominate.

Worst case scenario, if finance can’t be arranged, you may have to go ahead with the purchase. Without the backing of a home loan, that can mean losing your deposit and potentially facing legal action from the seller if the place ends up selling for less than you had agreed to pay.

The key take-out is that preparation is essential.

Stay in touch with your mortgage broker

Speak with your Mortgage Choice broker about home loan pre-approval and advice on how to discuss with the vendor and real estate agent for the place you would like to buy.

Your local Mortgage Choice broker is on your side. We have relationships with over 25 lenders which means we can often fast-track your application as long as your situation remains mostly unchanged between pre-approval and formal approval.

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Step-by-step guide to home ownership

There are many steps involved in purchasing a property which can vary between residential and investment properties. This guide explains each step in order as well as what is involved at every stage of the purchasing process.

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