When buying a home, it’s important to review your contract of sale carefully before signing to help you avoid any unexpected costs or consequences. One key clause to consider is the subject to finance clause, which can protect you if you’re unable to secure a home loan in time.
What does subject to finance mean?
A subject to finance clause is a common condition in property sale contracts that means the purchase only goes ahead if the buyer’s home loan is approved. It gives buyers time to arrange finance and protects them if their loan application is declined. If the lender doesn’t approve the finance by the date set out in the contract, the sale can be cancelled without penalty, meaning the buyer’s deposit is refunded and there are no legal consequences.
How long do subject to finance clauses last?
The timeframe for a subject to finance clause is negotiated between you and the seller, but most property contracts allow 14 or 21 days for your finance to be approved – though this period can sometimes be shorter or longer.
If you can't arrange finance within this timeframe, the seller might agree to extend the period. However, this depends entirely on their goodwill. Vendors are not legally required to offer extensions and can cancel the contract to accept another buyer’s offer if they choose. That means you’ll have to stay on top of your mortgage application and act before the clause lapses.
Cooling-off period vs subject to finance
A subject to finance clause is often confused with a cooling-off period, but they are two separate protections that work differently and apply to different situations.
Subject to finance is an optional clause in your property contract that allows you to withdraw from the contract only if your finance application is refused. It cannot be used to exit the contract simply because you decide you no longer want the property and you should be able to demonstrate that you have made every effort to secure funding.
Cooling-off periods let you cancel the contract if you change your mind after signing, though you will also be subject to a forfeit fee if withdrawing from the agreement during this time.The length and availability of cooling-off periods vary by state and territory and are set by state legislation, though they can be adjusted if agreed with the seller. The cooling-off period is five days in the ACT, NSW and QLD, four days in the NT, three days in VIC and two days in SA. TAS and WA have no legislated cooling-off period when buying a property.
Are subject to finance clauses mandatory when buying a home?
Subject to finance clauses are widely recommended and considered standard practice in many states when buying a home. However, they are not included in every contract of sale automatically, so you’ll need to take steps to make sure the clause is included.
It’s important to work with a solicitor or conveyancer who can review the contract to identify existing clauses, explain how they work and add a suitable subject to finance clause.
Keep in mind the seller must also agree to add the clause and that some sellers may reject it, especially if they want to sell quickly or prefer the lower risk of unconditional contracts.
The use and popularity of subject to finance clauses can vary between states. For example, it is less common in New South Wales and more frequently included in contracts in Queensland and Western Australia.
When can subject to finance clauses be included in a contract of sale?
A subject to finance clause applies to conditional sales – in other words, when the buyer needs a loan and their finance hasn’t yet been approved.
In situations where the contract is unconditional, the clause cannot be included. For example:
- Buying a property at auction
- Buying a property with cash rather than finance
It's important to be cautious when bidding at auction, as without a finance clause, you have no protections if your loan falls through. It's therefore important to have your finance pre-approved before you bid to reduce the risk of financial trouble.
Can vendors and real estate agents reject the inclusion of a subject to finance clause?
Yes, vendors can reject offers that include a subject to finance clause, and they often prefer unconditional offers that don’t depend on loan approval. This is typically because:
- Conditional offers carry more risk, with a greater chance the sale could fall through and no guarantee of compensation for any delays or cancellations.
- Sellers who need a quick sale want to avoid clauses that could slow the process or increase uncertainty.
Note that while real estate agents help facilitate these negotiations, they do not have the authority to decide on behalf of the vendor. While they can advise on the terms, the final decision to accept, reject or negotiate offers with a subject to finance clause is the seller’s alone.
Stand your ground with the subject to finance clause
"Because a subject to finance clause gives you an out if your loan isn’t approved, some real estate agents may try to pressure you to leave it out. But remember, you’re the one who bears the consequences if your finance falls through. Even if it’s your dream home, the risk of proceeding without that protection outweighs the benefit."
What happens if I make an offer on a home not subject to finance?
Making an offer without a subject to finance clause can speed up the process and may improve your chances with the seller. However, if your loan application is refused and the sale falls through, the financial consequences can be severe. Without protection, you risk losing your deposit and may even be pursued by the seller to cover any shortfall if they resell the property for less.
Let’s look at an example:
Laura found an apartment she liked in Perth and, not wanting to hold up the process or miss out on the property, made an offer without requesting a subject to finance clause in the contract. She was confident she’d get approved because she had pre-approval.
Laura paid a $60,000 deposit and then formally applied for her home loan. However, two weeks later, the lender rejected her application due to recent changes in her financial situation.
Without a subject to finance clause, Laura was legally required to complete the purchase. Unable to secure alternative financing in time, she lost her $60,000 deposit. When the seller resold the property for $20,000 less than Laura’s offer, they took legal action to recover the $20,000 difference.
In total, Laura lost $80,000 and ended up without the house.
If Laura’s contract had included a subject to finance clause, she could have withdrawn from the sale after her loan was declined. While she might have missed out on the house, she would have kept her $60,000 deposit and avoided any responsibility for the $20,000 difference when the seller resold the property.
This protection would have allowed her to use her deposit for another home purchase without additional financial loss.
Should I make an offer subject to finance if I’m pre-approved for my home loan?
Yes. Home loan pre-approval is an early indication from a lender about how much you might be able to borrow to buy a property based on your current financial situation. It gives you a better idea of your budget and more confidence that your loan application will be successful.
However, pre-approval is not a guarantee of full loan approval. During the final application process, lenders will perform a more detailed assessment, taking into account any recent changes to your finances, employment and credit history. The lender’s policies could also change. Because of this, there is still a chance your finance application could be declined.
Even with pre-approval, it’s wise to include a subject to finance clause. This way, you reduce your risk and can proceed with more peace of mind during the buying process.
Other helpful clauses to include in your contract of sale
When buying a property, there are other clauses you might want to include in your contract of sale to provide extra protection, help you avoid penalties or allow you to negotiate additional terms before completing the purchase. Some common clauses include:
- Subject to building inspection: gives you time to arrange a building inspection to check for any structural defects or issues with the property.
- Subject to pest inspection: allows you to conduct an inspection to identify any pest-related problems before finalising the sale, which can especially important for homes built on wooden supports or located in high termite-risk areas.
- Subject to sale: makes the property purchase conditional on the successful sale of your existing property within a set timeframe.
- Due diligence: allows you to carry out thorough investigations into the property, such as building inspections, checking environmental risks and verifying title details.
- Contemporaneous (simultaneous) settlement: ensures that the sale of your current property and the purchase of your new one are completed on the same day.
