Written by Fact checked
You may have seen the phrase ‘subject to finance’ in a sales contract, whether you’re buying a unit, a house, a car or a caravan, but what exactly does it mean and does it have any legal standing? Read all you need to know about ‘subject to finance' clauses with Savvy.
A sale contract with a ‘subject to finance’ clause means the sale is conditional upon the stated finance being approved. If the named bank or lender doesn’t approve the finance that has been applied for (namely your mortgage), the contract for sale can be cancelled due to the lack of finance approval without the buyer’s deposit being forfeited.
‘Subject to finance’ clauses are seen most commonly in contracts to buy property, but they are also included in car sales, caravan sales or any other sale where a real estate agent, car dealer or third party is involved in the sale process. They allow the buyer time to arrange full loan approval without the fear of losing their deposit.
Your ‘subject to finance’ clause shouldn’t be too vague. You should name the financial institution you are applying for a loan with in the clause and add details about the size of the loan and the interest rate you’re expecting. This gives you protection in case the lender does approve your loan, but for an amount or with an interest rate that isn’t satisfactory for you. That’s why it’s important to state the contract is conditional upon receiving a satisfactory finance offer.
Under a ‘subject to finance’ clause, you’re obliged to take ‘reasonable steps’ to obtain the finance as detailed in your sale contract. If you’ve taken all reasonable steps and have been turned down for your loan, and have no other means of continuing with the purchase of the property, you should notify the vendors as soon as possible in writing that you wish to terminate the sales contract.
You will need to provide your reason, being specific in the wording of the reason for your withdrawal, and request the return of your deposit. Your real estate agent should be able to provide you with a form containing the necessary wording if you are required to withdraw from a property purchase.
Yes – this is because pre-approval for a loan is not the same thing as full loan approval and doesn’t guarantee that you’ll be successful in obtaining finance. It’s estimated that around 8% of loan applications are ultimately rejected after pre-approval has been granted. Reasons for rejection after pre-approval has been granted include:
To offer you full protection against any unforeseen circumstances that may give you cause to cancel your offer to purchase, you may also wish to include the following ‘subject to…’ clauses in the sale contract you sign:
Yes – they are two separate items and are not related to each other. A ‘subject to finance’ clause is specific, and only allows you to withdraw from the contract if your finance application is rejected. A cooling-off period allows you to cancel a sales contract because you change your mind. It’s protection against making a rash decision which you regret in the next few days. Cooling off periods in Australia range from none at all (in WA and TAS) up to five days (in ACT, NSW and QLD). In VIC, it’s three business days, and in SA it’s two.
It’s most common in property purchase contracts to allow either 14 or 21 days for the necessary finance to be approved. For car or caravan purchases, 7 or 14 days is the most common time to allow finance to be organised, because such loans tend to be smaller and less involved than home loans.
Yes – a vendor might be willing to grant you a time extension if you are still negotiating your finance after the initial 14-day or 21-day time period is up. This does happen, although lenders are sensitive to time constraints and will usually give a borrower an answer within the period if at all possible. However, being granted an extension to organise finance may rely on the vendor’s goodwill, who aren’t legally obliged to offer you an extension. They would be within their rights to cancel the sale contract and sign one with another buyer.
Assuming the sale contract has been properly worded to make it clear that the sale is conditional upon receiving a satisfactory finance offer, the buyer should be fully protected if it becomes necessary to pull out of the sale contract, and the full deposit should be refunded. However, a badly worded ‘subject to’ clause can cause legal difficulties if the buyer wishes to cancel the sale contract.
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