Sign up for our FREE 8-week course to get on the property ladder.
Subject to finance clause
If you sign a contract to buy a house that's subject to finance, you're protected if you can't get a home loan and the deal falls through.
Subject to finance is a term you often see in a home buying contract. A subject to finance clause gives you the option of terminating your contract and getting your deposit back even if you can't get a home loan. This can be a lifesaver if you're buying a home and your finance falls through.
Do you need a subject to finance clause?
A subject to finance clause is a fairly standard inclusion in a property contract. It's also incredibly important.
It’s common practice to purchase a property before having your home loan completely sorted. Lenders don't process an entire application until there's a property that acts as security. And while it's a good idea to get pre-approval before you start the buying process, home loan pre-approval is not a guarantee.
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. 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 in a contract?
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 subject to finance clause?
If you breach the subject to finance clause you risk losing your deposit (if you have already paid it). And 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. And it also underscores the necessity of having your contract scrutinised by a conveyancer or solicitor. A legal expert can help you make sense of the contract and suggest alterations if you're not adequately covered.
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.
Need a home loan? Start comparing
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
Why you can trust Finder's home loan experts
More guides on Finder
How to get a home loan in Australia
Taking out a home loan can seem like a huge mountain to climb. But when you break it down into these 10 key steps, it becomes much easier.
Finder’s Property Investment Index Sydney
Finder's Property Investment Index predicts price growth in each suburb across Australia's major cities.
4 of the biggest mistakes people make when buying property
Chris Gray takes us through four things people get wrong when buying property.
Going once, twice, three times
Auction expert Damien Cooley gives the lowdown on why property auctions are the best way to sell right now.
APRA-cadabra: Why Australians will be able to get larger home loans
Richard Holden from UNSW Business School delves into Australian home loan sizes and rate cuts
Are Sydney house prices really set to fall?
We can't make clear predictions about Sydney's property market, but here's what the data suggests.
5 unbreakable laws for home makeovers
Designbx's Kerena Berry on how to give your interior design a professional look.
7 things you need to know about insurance when renovating
There's profit to be made in renovating your home, but don't jeopardise your insurance when you do.
What a $500,000 home looks like around the world
We compared what $500,000 will buy you in Australia vs 13 global markets to see which gets you the most bang for your buck.
How to cut 2 years off your mortgage
Australians are now drinking less than we previously were. Find out how you could save $40,000 by simply not drinking alcohol.
Find the right home loan now
Ask an Expert