PROPERTY LAW

Subject to Finance Clauses in Queensland Property Contracts: How Do They Work?

Buying property in Queensland? A subject to finance clause can provide important protection if your home loan is not approved. However, buyers need to understand their obligations, the finance deadline and the consequences of giving notice that finance has been approved.

By Katie Chan 

For many property buyers, obtaining finance is an essential part of completing a purchase.

A buyer may find the right property, negotiate an acceptable price and sign a contract, but still need their bank or lender to approve the home loan.

In Queensland, a property contract can be made subject to finance, giving the buyer an opportunity to obtain satisfactory loan approval before becoming unconditionally committed to the purchase.

However, a finance condition does not give a buyer an unrestricted right to withdraw from the contract.

The buyer must comply with the particular contractual requirements, take reasonable steps to obtain finance and give the appropriate notice within the required timeframe.

1. What Does “Subject to Finance” Mean?

A subject to finance clause makes the contract conditional upon the buyer obtaining finance approval in accordance with the contract.

Under the standard REIQ residential contract, the finance condition generally concerns the buyer obtaining approval of a loan for the specified finance amount from the specified financier by the finance date, on terms satisfactory to the buyer.

The buyer must also take all reasonable steps to obtain that approval.

This condition is particularly important where a buyer cannot complete the purchase without borrowed funds.

It can provide a contractual pathway to terminate if satisfactory finance is not obtained, provided the buyer has complied with the clause.

2. Make Sure the Finance Condition Is Properly Completed

Before signing, buyers should check that the finance section of the contract has been completed correctly.

The standard REIQ finance condition requires three important details:

• Finance amount: The amount of the loan the buyer needs.
• Financier: The lender or financier identified in the contract.
• Finance date: The date by which approval must be obtained.

Under the standard form, the finance condition does not operate unless all three details are completed.

A buyer should not assume that mentioning finance to the real estate agent means the contract is automatically conditional upon loan approval.

For a broader overview of what buyers should check before signing, read Buying Property in Queensland: What to Know Before You Sign a Contract.

3. Is Home Loan Pre-Approval Enough?

Not necessarily.

Pre-approval can provide an indication of how much a lender may be prepared to lend, but it is not always final approval for a particular property.

A lender may still need to:

• assess the signed contract;
• complete a property valuation;
• verify the buyer's income and liabilities;
• review the buyer's financial circumstances;
• confirm the proposed security;
• assess the property's suitability; and
• satisfy other lending requirements.

For example, Queensland Treasury's home-buying process distinguishes provisional approval from final approval after the buyer has found a property and supplied the contract to the lender.

Buyers should therefore avoid treating pre-approval as a guarantee that finance will be available at settlement.

4. How Long Should the Finance Period Be?

The appropriate finance period depends on the transaction.

Relevant considerations include:

• whether the buyer already has pre-approval;
• the lender's processing times;
• whether a valuation is required;
• the buyer's employment or business structure;
• whether the buyer is self-employed;
• whether the purchase involves a company or trust;
• whether another property must be sold; and
• whether additional loan documentation is required.

A buyer purchasing through a company or trust, for example, may need additional time for lender assessment.

Before agreeing to the finance date, speak with your broker or lender about a realistic timeframe.

Do not simply accept a short finance period because the seller or agent wants the contract to become unconditional quickly.

5. What Must the Buyer Do to Obtain Finance?

A finance condition is not an opportunity to sign a contract and then decide whether to apply for a loan.

Under the standard REIQ condition, the buyer must take all reasonable steps to obtain approval.

Depending on the circumstances, reasonable steps may include:

• submitting a finance application promptly;
• providing requested documents;
• supplying financial statements or tax returns;
• responding to lender enquiries;
• arranging any required valuation;
• following up outstanding requirements; and
• keeping the broker or lender informed of contractual deadlines.

A buyer who deliberately fails to pursue finance may not be entitled to rely on the condition to escape the contract.

6. What Does “Finance on Terms Satisfactory to the Buyer” Mean?

The standard REIQ finance condition refers to approval on terms satisfactory to the buyer.

This is important because a lender may approve a loan, but the approval may not necessarily be suitable for the buyer.

For example, the proposed loan might involve:

• a lower loan amount than required;
• an unacceptable interest rate;
• additional security;
• a requirement for a guarantor;
• an unexpectedly large cash contribution; or
• other conditions affecting the buyer's ability to complete the purchase.

The standard wording allows a buyer acting honestly to determine whether the finance terms are satisfactory to their particular needs.

However, the buyer must act honestly and comply with the contract.

A buyer should obtain legal advice before relying on dissatisfaction with finance terms as a basis for termination.

7. What Happens if the Bank Values the Property Below the Purchase Price?

A lender may obtain a valuation of the property before approving the loan.

Sometimes the valuation is lower than the price the buyer has agreed to pay.

In this example, the buyer may need to contribute more funds than originally anticipated, in addition to purchase costs.

A lower valuation does not automatically mean the contract can be terminated.

The position depends on whether the buyer can obtain finance on the terms required by the contract and whether the buyer has complied with the finance condition.

If the lender's valuation creates a funding shortfall, contact your broker and solicitor promptly.

8. What if Finance Is Declined?

If finance is declined, the buyer should obtain written confirmation from the lender or broker and immediately contact their solicitor.

Under the standard REIQ finance condition, the buyer may be entitled to terminate where the required approval has not been obtained by the finance date, provided the contractual requirements are satisfied.

The buyer should not assume that a verbal statement from the bank automatically terminates the property contract.

The contract ordinarily requires the buyer to give the seller the appropriate notice.

9. What if Finance Is Still Being Processed?

A lender may not have made a final decision by the finance date.

This can happen because:

• a valuation is outstanding;
• the lender needs further documents;
• the buyer's circumstances require additional assessment;
• a guarantor is involved;
• the application has been delayed internally; or
• a third party has not supplied required information.

If approval is still pending, the buyer should consider the available contractual options before the deadline.

Depending on the circumstances, these may include:

1. Requesting an extension of the finance date.
2. Terminating under the finance condition if the contractual requirements are satisfied.
3. Waiving the finance condition and proceeding, if the buyer is prepared to accept the resulting risk.

Do not assume that a pending application automatically extends the finance date.

10. Can You Request an Extension of the Finance Date?

Yes.

If the lender needs more time, the buyer can request an extension from the seller.

However, the seller is not necessarily required to agree.

Legal Aid Queensland has explained that a buyer does not have an automatic entitlement to extend a finance date merely because the bank has delayed processing the application.

Any extension should be agreed and properly documented.

The buyer should not rely on an informal conversation with the real estate agent as confirmation that the contractual deadline has changed.

11. What Notice Must Be Given by the Finance Date?

Under the standard REIQ residential finance condition, the buyer must give notice to the seller that either:

• finance approval has not been obtained and the buyer terminates the contract; or
• the finance condition has been satisfied or waived.

The standard clause gives the seller a termination right if the buyer has not given the required notice by 5pm on the finance date.

The exact notice requirements must always be checked against the particular contract and any special conditions.

Your solicitor should ensure the correct notice is given to the correct party in the required manner.

12. What Happens if You Miss the Finance Date?

Missing the finance deadline can create significant risk.

Under the standard REIQ condition, if the buyer fails to give the required notice by 5pm on the finance date, the seller may terminate by notice.

The standard wording also preserves the buyer's continuing rights to give an applicable finance notice before the seller exercises that termination right.

Accordingly, a missed deadline does not necessarily mean the contract automatically becomes unconditional or automatically terminates.

The consequences depend on the contract and which party takes the next valid step.

If the deadline has passed, obtain advice immediately.

13. Can the Seller Terminate if Finance Is Delayed?

Potentially.

Under the standard REIQ condition, the seller's right to terminate can arise where the buyer fails to give the required finance notice by the contractual deadline.

However, the seller does not necessarily have an unrestricted right to terminate simply because the buyer's lender is taking longer than expected.

The contract wording, notices already given and any agreed extensions must be considered.

14. Can You Terminate if You Simply Change Your Mind?

No.

A finance condition is not intended to operate as a general change-of-mind provision.

A buyer cannot necessarily avoid the contract by:

• deciding they no longer like the property;
• failing to submit a loan application;
• deliberately withholding information from the lender; or
• abandoning an otherwise viable finance application.

The buyer must comply with the contractual requirement to take reasonable steps to obtain finance.

If the buyer has obtained satisfactory finance, the finance condition should not be treated as a substitute for a general cooling-off right.

15. What Happens Once You Confirm Finance Approval?

This is a particularly important point.

Once the buyer gives notice that the finance condition has been satisfied or waived, the buyer should not assume they can later revive that condition if the lender changes its position.

Where a buyer has already notified the seller of finance approval, the buyer cannot simply rely on the finance condition to cancel if the bank subsequently withdraws approval.

Before confirming finance approval, make sure you understand:

• whether approval is unconditional;
• whether the approved amount is sufficient;
• whether the lender requires additional security;
• whether all significant approval conditions can be met;
• whether the buyer has sufficient funds for the balance of the purchase price and costs; and
• whether the lender can complete settlement on time.

Do not give a finance satisfaction or waiver notice merely because the bank has indicated that approval is likely.

16. Conditional Approval Versus Unconditional Approval

Lenders use different terminology, and the significance of an approval letter depends on its actual terms.

A conditional approval may still require:

• a satisfactory valuation;
• mortgage insurance approval;
• verification of income;
• discharge of an existing loan;
• evidence of savings;
• insurance;
• additional documents; or
• other matters.

Some conditions may be routine, while others could materially affect the buyer's ability to obtain the loan.

Your solicitor and broker should consider the actual approval terms before the finance condition is confirmed as satisfied.

17. What if the Bank Withdraws Finance After Approval?

A lender may withdraw or alter an approval before settlement in some circumstances.

For example, the lender may become aware of a material change in the buyer's financial circumstances or discover that an approval condition has not been satisfied.

If the buyer has already confirmed finance under the contract, the finance condition may no longer provide an available termination right.

The buyer may then face the risk of being unable to complete settlement.

This is why buyers should avoid making significant financial changes between approval and settlement without considering their effect on the loan.

18. What Happens to the Deposit if Finance Is Not Approved?

Where a buyer validly terminates under an applicable finance condition, the deposit will generally be refundable in accordance with the contract.

However, the deposit is not automatically refundable merely because the buyer says the bank declined finance.

The buyer must have a valid contractual basis for termination and comply with the relevant requirements.

If the seller disputes the termination, a dispute about the deposit may arise.

Obtain legal advice before issuing a termination notice.

19. What if the Contract Is Not Subject to Finance?

If the contract is unconditional as to finance, the buyer generally bears the risk of obtaining the money needed to complete the purchase.

If the lender subsequently refuses the loan, the buyer may still be contractually required to settle.

Failure to settle can expose the buyer to serious consequences under the contract, potentially including loss of the deposit and a claim for additional loss.

You should obtain legal advice about appropriate conditions before signing a property contract.

20. Buying at Auction

Auction purchases require particular care.

A successful bidder will ordinarily enter into an unconditional contract without a finance condition or statutory cooling-off period.

Queensland Government guidance warns that auction buyers should arrange their finance and other investigations before bidding.

A buyer who intends to bid at auction should understand the lender's requirements and the consequences if final finance approval is not obtained.

Do not assume that pre-approval alone eliminates the financial risk.

21. Finance and Building and Pest Conditions Are Separate

A property contract may be subject to both:

• finance; and
• building and pest inspections.

These conditions serve different purposes and may have different deadlines.

A buyer may receive satisfactory building and pest reports but still be waiting for finance.

Alternatively, finance may be approved while a significant defect remains under investigation.

Each condition must be addressed separately in accordance with the contract.

For more information about inspection requirements, read Building and Pest Conditions in Queensland Property Contracts: What Buyers Need to Know.

22. What if You Are Selling One Property to Buy Another?

Some buyers need proceeds from the sale of their existing property to complete a new purchase.

A finance condition does not necessarily protect a buyer against every problem arising from a linked sale.

For example, the buyer may have finance approval but still be unable to settle because the sale of their existing property is delayed.

If your purchase depends on another transaction, obtain advice about whether an appropriate subject to sale condition or another special condition is required.

The contracts and settlement dates should be considered together.

23. What if You Are Buying Through a Company or Trust?

A company or trust purchase can involve additional financing requirements.

A lender may require:

• trust documents;
• company records;
• financial statements;
• guarantees;
• evidence of the purchasing structure; and
• additional security or approvals.

The purchasing entity should be considered before signing the contract.

Changing the buyer after signing can have legal, financing and transfer duty consequences.

Where a company or trust is involved, coordinate legal and finance advice early.

24. Common Mistakes Buyers Should Avoid

Common mistakes include:

• assuming pre-approval is final approval;
• failing to complete the finance section of the contract;
• agreeing to an unrealistic finance date;
• delaying the loan application;
• failing to provide documents requested by the lender;
• assuming the bank will approve the contract price;
• overlooking a valuation shortfall;
• treating conditional approval as unconditional;
• missing the finance deadline;
• relying on a verbal extension;
• confirming finance before understanding the approval conditions;
• assuming finance can be withdrawn without contractual consequences;
• failing to coordinate a linked property sale; and
• terminating without obtaining legal advice.

A finance condition is valuable, but the protection depends on its wording and proper compliance.

Before Your Finance Date: A Practical Checklist

Before the finance deadline, ask:

Have I submitted my loan application?

Have I provided all documents requested by the lender?

Has the property valuation been completed?

Is the approved loan amount sufficient?

Do I understand all approval conditions?

Do I have enough funds for the balance of the purchase price and costs?

Can the lender settle on time?

Do I need an extension?

Have I spoken with my solicitor?

Has the correct contractual notice been given?

If there is uncertainty about finance, seek advice before the deadline rather than assuming the matter can be resolved later.