Updated: Oct 13
Many Queensland property purchases include a standard finance clause. A contract subject to finance gives a buyer time to apply for and obtain unconditional finance approval to purchase a property. If they are unsuccessful in obtaining formal approval, they can also validly terminate the contract under this clause.
Any buyer relying on a loan to purchase a property should include a finance clause. If you do not require a loan and are paying cash, you generally do not need to include a finance clause in the contract.
In This Article:
What Is the Finance Clause?
The finance clause allows the Buyer an opportunity to obtain finance from a lender (generally a bank or other financier).
Contracts should always be made subject to finance where the Buyer requires a loan for any part of the purchase price.
Before securing a property, it is also recommended that a buyer obtain a finance pre-approval (also known as conditional approval) from their lender to understand their borrowing power when looking for a property and to help obtain formal approval once they have secured a property.
How Do I Know If My Contract Is Subject To Finance?
While the parties can set the finance clause at any time, it is generally due within 14-21 days from the Contract Date. This is because lenders often need time to review your finance application, prepare and make necessary enquiries, and formally approve you. All lenders have different requirements and timeframes, but it is rare to move from application to unconditional finance approval in under 14 days.
In a standard form REIQ contract, you must specify the finance amount, financier, and finance date on Page 3, as shown below.
If the Finance Amount, Financier or Finance Date is not entered, the contract is likely not subject to finance. All three details must be entered.
Note that even if the above details are left blank, a buyer may still need third-party funds to purchase the property. This is where further special conditions may be required, such as relying on funds from a deceased estate, involving multiple lenders, or making the contract conditional on the sale of the Buyer's existing property. In these circumstances, we always recommend that you have a solicitor review a draft contract before signing to ensure it meets your needs and any special conditions are worded correctly.
In a standard REIQ Contract, standard term 3 sets out the rights of the Buyer and Seller and the strict timeframes in which these rights can be exercised.
In most circumstances, we would recommend buyers who are relying on finance enter the Finance Amount, Financier and Finance Date as below:
Even if a Buyer has pre-approval from a specific lender or for a specific amount, including those details in the contract means you are bound to that institution and finance amount. Always keep your options open in case your circumstances change during the transaction.
If you're looking for an example of where listing a specific financier or finance amount can be disastrous for a buyer, we recommend reading Hauff & Anor v Miller [2013] QCA 48.
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A Pre-approval Is Not Finance Approval!
Most buyers know the importance of getting pre-approval (also known as conditional approval) before securing a home. It can help you understand your borrowing power and guide your house hunt.
Unfortunately, we often encounter buyers who also falsely believe that pre-approval guarantees their finance. This is not the case, and can be disastrous should you satisfy or waive the finance clause only to find your lender will not provide unconditional finance approval.
What Is The Difference Between Pre-Approval and Unconditional Finance Approval?
A finance pre-approval (also known as conditional approval) means your loan has been assessed and approved in principle, but the lender needs more information or action before granting formal unconditional finance approval. Generally, the additional information may include evidence of income, a property valuation, consolidation or payout of loans or outstanding debts, and so on. Importantly, at any time when assessing outstanding information or tasks, your lender can withdraw their offer.
An unconditional finance approval means the lender has received your application, assessed all relevant paperwork and supporting documents, and decided to offer a home loan based on the chosen property.
You should be aware that both conditional and unconditional finance approvals do not last indefinitely and often have a timeframe. In most cases, this is around three months, depending on what your lender has set out or told you.
If the timeframe lapses, a lender can still withdraw any offer before settlement, especially if your circumstances change.
This is very important when purchasing Off-The-Plan, which may sometimes take years to register with council and ultimately settle. In these situations, regularly review and renew your finance approval to ensure that when settlement is called, you and your lender are prepared.
I Want To Proceed But Do Not Have Unconditional Finance Approval
We always recommend that, unless you have an unconditional finance approval that won't lapse before the settlement date in your contract, you never satisfy or waive the finance condition.
This is because the risks are far too high. If you are unable to satisfy the conditions of the finance approval, or your circumstances change, and the lender withdraws the offer and/or declines to finance your loan, and you have satisfied or waived the finance clause, you cannot withdraw from the contract as you have negated your termination rights under this condition.
If this happens, and you do not have sufficient funds to complete settlement, the Seller can elect to either affirm the contract or terminate.
If the Seller elects to affirm your contract, they can sue you for their loss or damage and/or seek specific performance (compelling you to make the purchase).
If the Seller elected to terminate your contract, they can keep your deposit, and can sue you for loss or damage (including their legal costs on indemnity), take possession of the property and even sue you for the difference in the resale value of the property (if less than what you were prepared to buy it for).
I Didn't Receive Satisfactory Finance Approval, What Do I Do?
While disheartening for some buyers, it's important to exercise your rights under the finance clause.
If you don't receive satisfactory finance approval by the due date, you can terminate the contract (provided it's subject to finance).
The key word here is 'satisfactory'. A lender may still approve you for a loan, but the terms or amount may not be satisfactory to you. In other instances, you may be rejected for a loan altogether.
Additionally, under standard term 3.1, you must take all 'reasonable steps' to obtain finance approval. If you have not done so and cannot secure finance, you may not have valid grounds to terminate the contract. This prevents a Buyer from using the finance clause to terminate the contract for another reason, such as a change of mind or other personal circumstances.
If you cannot obtain satisfactory finance approval, and you have taken all reasonable steps to do so, you should terminate the contract by 5:00PM on the due date. You should also provide your conveyancer or solicitor with a copy of the rejection or unsatisfactory finance terms for their records.
Remember that solicitors are not accountants or financial advisors. They cannot advise you whether loan terms are satisfactory and appropriate for you. If you receive approval but are unsure whether it meets your needs, speak with a broker, accountant, and/or financial advisor for appropriate advice.
I Have Unconditional Finance Approval, Can I Satisfy Finance?
Firstly, congratulations! Your lender has unconditionally approved you.
If you receive unconditional finance approval, first ensure you are satisfied with the terms of that approval. This may involve speaking with your broker and/or financial advisor to ensure it is in your best interests.
If you are satisfied with your unconditional finance approval, you must notify your solicitor or conveyancer, who will then satisfy the Seller or the Seller's Solicitor by 5:00 PM on the finance clause due date.
If the finance due date passes (5:00 PM on the due date), the contract remains on foot, but the Seller can terminate the contract for the Buyer's failure to provide notice.
For many standard contracts without special conditions or other unique clauses, the buyer or real estate agent often asks whether the contract is now unconditional. If a buyer has satisfied the finance clause, the contract is unconditional in that regard. Whether the contract is unconditional depends on whether any further deposits are payable, the cooling-off period has passed, and/or the building and pest condition has been satisfied. Your conveyancer or solicitor can confirm when your contract becomes unconditional.
If I Terminate The Contract, Will I Get My Deposit Back?
If the buyer validly terminates the contract under a finance clause, the buyer is entitled to a refund of the full deposit.
If you are unsure whether your contract includes any further conditions, your conveyancer or solicitor can confirm your rights before you terminate under finance.
Still Have Questions?
If you still have questions, contact our solicitors to see how we can help.
Disclaimer: This publication is not intended to be comprehensive, nor does it constitute legal advice. We are unable to ensure the information is current, and there is no guarantee in relation to accuracy. You should seek legal or other professional advice before acting or relying on any of the content of this publication. The views and/or opinions expressed in this publication are those of the author and may not necessarily represent the views and/or opinions of RHC Solicitors.
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