What is a subject to finance clause and do you need one?

How a subject to finance clause can save you from ruin, or cause you pain.Icon of a contract

A home loan contract is a pretty intimidating legal document, and it can be confusing to peruse. It’s stuffed with byzantine language nested in clauses and sub-clauses, and seems designed to leave the average buyer bewildered.

But it’s actually important to pay attention to those clauses, because they could protect you in the event something goes awry. One clause you should give particular attention to is the subject to finance clause.

What is a subject to finance clause?

A subject to finance clause is a clause that’s intended to protect the purchaser. It states that your agreement to buy a property is subject to obtaining the finance you’ll need to go ahead with the purchase.

This clause makes the purchase conditional upon receiving finance, generally in the form of a home loan. It also sets out the steps you need to follow to inform the property’s vendor if you’re unable to obtain finance. The clause gives you the option of terminating the contract and recouping your deposit if this happens.

Read more: the best home loan tips

Do you need one?

A subject to finance clause is a fairly standard inclusion, and is also incredibly important.

It’s common practice to purchase a property before having your home loan completely sorted. In all likelihood, you would go to an auction or enter into a private treaty sale after getting pre-approval from a lender. While it’s very smart to get pre-approval, it isn’t an ironclad guarantee.

Home loan pre-approval merely means that your bank has decided it is likely to approve your loan. It isn’t legally obligated to do so, and you’re not legally obligated to accept. Any number of hurdles can come up between pre-approval and unconditional approval.

A subject to finance clause serves to protect you in the event that your lender decides not to go ahead with the home loan. It’s crucial that you make sure this clause is included in your contract, unless you’re 100% certain your home loan is in order.

Subject to finance clauses are especially important if there’s any doubt about a property’s valuation. Once you’ve signed a contract to buy a property, your lender will conduct a valuation. If this valuation comes in lower than expected, they could decide not to extend you credit for your purchase, or to offer you a lower loan amount. Without a subject to finance clause, you could be caught having to make up the shortfall.

What should you look out for?

While subject to finance clauses are important, not all are created equal. While one clause could protect you and your deposit money, another could end up being used as a weapon to pursue you for damages should your purchase not go through.

Pay attention to the following:

  • Wording. A subject to finance clause states that you as the purchaser will take all reasonable steps to acquire finance. If you don’t pay attention to the wording, those “reasonable steps” could put you in an unreasonable position.
  • Specificity. The clause shouldn’t just make a general statement about obtaining finance. It should state that the purchase is subject to obtaining finance with satisfactory terms. It could even go so far as to state that the purchase is subject to obtaining finance from a specific institution at an interest rate not higher than a specific amount. This protects you in the event your preferred lender doesn’t approve your home loan.
  • Expiry. You should also pay attention to when the clause expires. Most subject to finance clauses have a certain time and date by which finance must have been obtained. Again, if you don’t have your home loan sorted by this time and date, you will have breached the clause.

What happens if you breach the clause?

Woman signing a contract
If you breach the subject to finance clause, the contract to purchase will move from conditional to unconditional. This means your agreement to purchase the property is no longer subject to conditions. You’re now legally obligated to purchase the property, no matter what.

When this happens, you will have forfeited your deposit. However, this may not be the end of your troubles. Because you are legally obligated to buy the property, the vendor could force you to go ahead with the purchase. On top of this, they can also sue you for breach of contract, making you liable for damages and court costs.

This could add up to an overwhelming financial burden very quickly. For instance, if the vendor was counting on the funds from the sale to buy another property, they could pursue you for any losses resulting from their purchase falling through.

This is why it’s incredibly important to pay attention to the subject to finance clause, and to ensure it provides you adequate protection.

How do you know you’re protected?

Ultimately, you shouldn’t rely on your own assessment of a subject to finance clause. It’s crucial to seek out legal advice when buying a property. Have a solicitor examine the contract to ensure it provides the protection you need.

The fees you pay to a good solicitor will, of course, add to the cost of purchasing your home. However, making certain you’re protected in the event something goes wrong with your finance could save you untold costs in the long-run.

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