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Subject to Finance Explained

Making an offer to buy subject to finance makes good sense. Savvy explains what this clause is and how it works.

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, updated on August 8th, 2023       

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You may have seen the phrase ‘subject to finance’ in a sales contract, whether you’re buying a unit, a house, a car or a caravan, but what exactly does it mean and does it have any legal standing?  Read all you need to know about ‘subject to finance' clauses with Savvy.

What exactly does 'subject to finance' mean?

A sale contract with a ‘subject to finance’ clause means the sale is conditional upon the stated finance being approved.  If the named bank or lender doesn’t approve the finance that has been applied for (namely your mortgage), the contract for sale can be cancelled due to the lack of finance approval without the buyer’s deposit being forfeited.

‘Subject to finance’ clauses are seen most commonly in contracts to buy property, but they are also included in car sales, caravan sales or any other sale where a real estate agent, car dealer or third party is involved in the sale process.  They allow the buyer time to arrange full loan approval without the fear of losing their deposit.

‘Subject to finance’ mistakes to avoid

Your ‘subject to finance’ clause shouldn’t be too vague.  You should name the financial institution you are applying for a loan with in the clause and add details about the size of the loan and the interest rate you’re expecting.  This gives you protection in case the lender does approve your loan, but for an amount or with an interest rate that isn’t satisfactory for you.  That’s why it’s important to state the contract is conditional upon receiving a satisfactory finance offer.

If I’m unable to get my loan approved, how do I cancel the sales contract under a ‘subject to finance’ clause?

Under a ‘subject to finance’ clause, you’re obliged to take ‘reasonable steps’ to obtain the finance as detailed in your sale contract.  If you’ve taken all reasonable steps and have been turned down for your loan, and have no other means of continuing with the purchase of the property, you should notify the vendors as soon as possible in writing that you wish to terminate the sales contract. 

You will need to provide your reason, being specific in the wording of the reason for your withdrawal, and request the return of your deposit.  Your real estate agent should be able to provide you with a form containing the necessary wording if you are required to withdraw from a property purchase.

Does 'subject to finance' still apply if I have pre-approval for my home loan?

Yes – this is because pre-approval for a loan is not the same thing as full loan approval and doesn’t guarantee that you’ll be successful in obtaining finance.  It’s estimated that around 8% of loan applications are ultimately rejected after pre-approval has been granted.  Reasons for rejection after pre-approval has been granted include:

  • the borrower’s circumstances change between pre-approval and loan application (for example, the borrower reduced the hours they work or disclosed they were pregnant and would be giving up work)
  • the pre-approval period had expired (pre-approval is usually only granted for a three-month period)
  • the lender uncovered information they were not previously aware of when they granted pre-approval (for instance, they subsequently found out the borrower had been declared bankrupt)
  • the borrower was unable to provide satisfactory evidence or proof as requested by the lender (for instance, a borrower claimed they earned a salary of $95,000 when they applied for pre-approval, but subsequent payslips showed their salary was nearer $80,000)
  • the lender’s loan criteria, lending policies or interest rates change in between pre-approval and full loan approval

What other ‘subject to...’ clauses should be included in my home purchase offer?

To offer you full protection against any unforeseen circumstances that may give you cause to cancel your offer to purchase, you may also wish to include the following ‘subject to…’ clauses in the sale contract you sign:

  • Subject to building inspection (to give you time to arrange a building inspection to make sure the property has no structural defects)
  • Subject to a pest inspection (especially important if the house is built on wooden supports and/or is located in a high termite risk area)
  • Subject to independent evaluation (your lender may insist on an independent valuation of the property you are proposing to buy before approving your finance)
  • Subject to sale (of another property, if you are selling one house and buying another in the same transaction, and the second one is dependent on the first sale taking place successfully)

Here’s more of your frequently asked questions about subject to finance

Does a 'subject to finance' clause last after my cooling-off period is over?

Yes – they are two separate items and are not related to each other.  A ‘subject to finance’ clause is specific, and only allows you to withdraw from the contract if your finance application is rejected.  A cooling-off period allows you to cancel a sales contract because you change your mind.  It’s protection against making a rash decision which you regret in the next few days.  Cooling off periods in Australia range from none at all (in WA and TAS) up to five days (in ACT, NSW and QLD).  In VIC, it’s three business days, and in SA it’s two.

How long do ‘subject to finance’ clauses last?

It’s most common in property purchase contracts to allow either 14 or 21 days for the necessary finance to be approved.  For car or caravan purchases, 7 or 14 days is the most common time to allow finance to be organised, because such loans tend to be smaller and less involved than home loans.

Can I extend my ‘subject to finance’ clause for longer if I'm having trouble getting loan approval?

Yes – a vendor might be willing to grant you a time extension if you are still negotiating your finance after the initial 14-day or 21-day time period is up.  This does happen, although lenders are sensitive to time constraints and will usually give a borrower an answer within the period if at all possible.  However, being granted an extension to organise finance may rely on the vendor’s goodwill, who aren’t legally obliged to offer you an extension.  They would be within their rights to cancel the sale contract and sign one with another buyer.

Does a 'subject to finance' clause offer full legal protection to a buyer?

Assuming the sale contract has been properly worded to make it clear that the sale is conditional upon receiving a satisfactory finance offer, the buyer should be fully protected if it becomes necessary to pull out of the sale contract, and the full deposit should be refunded.  However, a badly worded ‘subject to’ clause can cause legal difficulties if the buyer wishes to cancel the sale contract.

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