We generally advise our clients, no matter where they are in Australia, to include the finance clause in their Contract of Sale. Here is our list of FAQs surrounding the ‘Subject to Finance’ clause.
What is the finance clause?
‘Subject to Finance’ (STF) means that the buyer will only proceed with the purchase if formal loan approval is received from a financial institution (i.e. the bank).
The STF clause is beneficial for the buyer. It allows the buyer sufficient time to determine whether they have the capacity to take out a loan to finance their purchase.
What do I need to be wary of when I sign the contract ‘subject to finance’?
The finance due date is crucial. To ensure the due date for formal loan approval is met, you will need to:
- Discuss with your broker/banker:
– the expected turnaround time for your lender to approve your loan application; and
– the loan amount you will require to complete your purchase.
- Do everything necessary to ensure you have a formal loan approval granted within the specified period.
The finance clause will expire once the approval date has lapsed unless extended by agreement. A conveyancer or property lawyer can help you draft the conditions of the finance clause.
I have pre-approval – would I still benefit from signing a contract with the finance clause?
The simple answer is YES!
A pre-approved loan may increase your chances of loan approval but is not a guarantee of loan approval. The loan approval process allows the financial institution to assess whether they are happy to loan based on:
- The buyer’s financial position; and
- Whether the property is acceptable security to secure the loan.
Therefore, signing a contract subject to finance provides you time to find out whether a financial institution is likely to approve your finance for the property you seek to purchase.
Just because you may have sufficient borrowing capacity does not mean the property itself will be approved. For example, there may be flammable cladding on the apartment you wish to buy, or the unit you’re eyeing may be too small for loan approval. There may be a telephone pole outside the property which the bank may assess to be too close and not grant approval. The bank does not assess the property or your contract for formal loan approval until after it is signed, so it may be too late for you to find out about these issues if you did not subject the contract to finance.
What can I do if my loan application is rejected?
If you subjected the contract to finance, and your home loan application is declined, you may:
- Withdraw from the contract provided you have done all things necessary to obtain formal loan approval and have not breached your contract obligations; or
- Seek an extension of the finance clause so you may submit an alternate finance application to an alternate lender for approval.
How can W Legal Group help?
At W Legal Group, we can assist with navigating through your purchase contract, including the satisfaction of your finance clause. Contact our property lawyers at hello@wlegalgroup.com.au or call any of our Australian phone numbers.
