Subject to Finance
What does ‘subject to finance’ mean?
If you are borrowing funds from a lending institution to purchase a property, you should consider making the Contract of Sale “subject to finance”. A clause is added to the Contract which allows you to pull out of the Contract of Sale and obtain a refund of your full deposit if you can’t obtain finance. This is applicable in Victoria only.
The ‘subject to finance’ clause specifies that the contract is conditional or “subject” to the purchaser being able to borrow the funds from the bank. Making a contract “subject to finance” is a safe move as your capacity as a purchaser to borrow money is never a given. There are also sometimes situations where the purchaser’s bank performs a valuation of the property and it is not as favourable as you might have hoped.
Terms of the ‘subject to finance’ clause
It is standard practice to make a contract of sale subject to a 7, 14 or even a 21-day finance period from the date that the contract is exchanged. An extension of the subject to finance clause can be requested if there are delays in obtaining finance approval although the vendor may not agree to extend. If the vendor is not agreeable to an extension, the contract of sale can be terminated or the purchaser can decide to proceed unconditionally without securing the finance.
If you are terminating the contract of sale, you, as the purchaser must use your best endeavours to obtain the finance. You must be able to show that you made a genuine attempt to obtain finance with a formal decline letter from the lending institution.
When can the ‘subject to finance’
clause be used?
The “subject to finance” clause option is only available for private sales and not public auctions. Auctioned properties need to be purchased ‘unconditionally’, with no strings attached. You should however have a pre-approval in place in both instances. A pre-approval indicates you can borrow funds from a bank subject to certain conditions. Once these conditions are met the bank or lender will issue an unconditional finance approval.
Pre-approvals are subject to valuation and in most cases the lender will perform a valuation of the property to find out its current market value before agreeing to lend you any funds.
The risks of using a finance clause
Having a ‘subject to finance’ clause does not automatically entitle you to end a contract of sale and have your deposit refunded in full. There is a procedure that needs to be followed and the purchaser must take the necessary steps outlined in general condition 14 of the Contract of Sale (VIC).
If the purchaser has not made attempts to obtain a loan or contacted the vendor advising them of their position, the contract may automatically become unconditional. If the subject to finance clause lapses and the contract becomes unconditional, the purchaser has no option but to proceed with the purchase. If the purchaser does not settle, the purchaser will lose their deposit and may be sued by the vendor for damages for breach of contract and be liable for any additional costs incurred by the vendor.
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