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Subject to finance clause

What is a subject to finance clause and how can it save you from financial ruin?

Updated

It’s important to pay attention to all the details of a home loan contract 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.

A subject to finance clause gives you the option of terminating your loan contract and recovering your deposit if you can't get finance approved. In other words, the property purchase becomes conditional on you being able to get finance (a mortgage). If you are unable to get a home loan then the subject to finance clause means you can get your deposit back.

This clause also sets out the steps you need to follow to inform the property’s vendor if you’re unable to obtain finance.

Here's how it works.

Do you need a subject to finance clause?

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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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
Athena Variable Home Loan - Owner Occupier, P&I
2.59%
2.55%
$0
$0 p.a.
80%
Owner-occupiers with 20% deposits can get this competitive variable rate mortgage. $0 application fee and $0 ongoing fees.
UBank UHomeLoan Variable Rate - Discount Offer for Owner Occupiers, Variable P&I Rate
2.49%
2.49%
$0
$0 p.a.
80%
Enjoy flexible repayments, a redraw facility and the ability to split your loan. Plus, pay no application or ongoing fees.
St.George Basic Home Loan - LVR 60% to 80% (Owner Occupier, P&I)
2.64%
2.66%
$500 (waived for loans above $150,000)
$0 p.a.
80%
Refinancers borrowing $250,000 or more can get up to $3,000 cashback (Other terms, conditions and exclusions apply). A low variable interest rate for home buyers and refinancers. Application fee waived for loans above $150,000.
HSBC Home Value Loan - Promotional Offer (Owner Occupier P&I)
2.65%
2.66%
$0
$0 p.a.
80%
Get a low interest rate loan with no ongoing fees. Plus you can make extra repayments and free redraw online.
Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR<=90% Incl. LMI (Owner Occupier, P&I)
2.78%
2.79%
$0
$0 p.a.
90%
Get one free online redraw per month and pay no ongoing fees. Application fees are waived for loans above $150,000. Refinance to an eligible Suncorp loan and get a cashback of $2,000 or $3,000, depending on your loan amount. Other conditions apply.
Homestar Star Essentials Home Loan - $250K to $850K LVR up to 80% (Owner Occupier, P&I)
2.39%
2.42%
$0
$0 p.a.
80%
A low rate variable mortgage with minimal fees and redraw facility. Requires a 20% deposit. Eligible refinancers can receive up to $1,500 cashback. Conditions apply.
Macquarie Bank Basic Home Loan - LVR ≤ 60% (Owner Occupier, P&I)
2.59%
2.59%
$0
$0 p.a.
60%
A competitive variable rate home loan for owner-occupiers. Requires a 40% deposit.
ING Mortgage Simplifier Home Loan - $150,000 to $500,000 (LVR <=80% Owner Occupier, P&I)
2.59%
2.62%
$0
$0 p.a.
80%
This low, variable rate loan has no ongoing fees and a redraw facility. Requires a 20% deposit.
Bankwest Complete Home Loan Package Variable - $200k to <$750k LVR <=80% (Owner Occupier, P&I)
2.73%
3.18%
$0
$395 p.a.
80%
A low variable rate loan with a 100% offset account and package discounts.
Homestar Star Classic Owner Occupied Fixed Special
1.98%
2.51%
$495
$0 p.a.
80%
A very low 1-year fixed rate for home buyers. Requires a 20% deposit.
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Logo for Athena Variable Home Loan - Owner Occupier, P&I
Athena Variable Home Loan - Owner Occupier, P&I

Owner-occupiers with 20% deposits can get this competitive variable rate mortgage. $0 application fee and $0 ongoing fees.

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UBank UHomeLoan Variable Rate - Discount Offer for Owner Occupiers, Variable P&I Rate

Take advantage of a low-fee mortgage with a special interest rate of just 2.49% p.a. and a 2.49% p.a. comparison rate.

Logo for HSBC Home Value Loan - Promotional Offer (Owner Occupier P&I)
HSBC Home Value Loan - Promotional Offer (Owner Occupier P&I)

Get a low interest rate loan with no ongoing fees. Plus you can make extra repayments and free redraw online.

Logo for Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR<=90% Incl. LMI (Owner Occupier, P&I)
Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR<=90% Incl. LMI (Owner Occupier, P&I)

Get one free online redraw per month and pay no ongoing fees. Application fees are waived for loans above $150,000. Refinance to an eligible Suncorp loan and get a cashback of $2,000 or $3,000, depending on your loan amount. Other conditions apply.

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