One of the most common clauses in a property contract is the finance clause. In layman's terms it usually states that the buyer will proceed to purchase the property if they can get financing, usually in the form of a mortgage.
That seems clear cut but there are certain obligations the buyer has to undertake in these circumstances. Because the contract is not only saying the purchaser will buy IF they get the financing but that they will also do everything they can to secure that finance.
So as a buyer what are your rights and obligations when buying property under the finance clause? We'll look at the legal terms and what that means to you.
Your Rights When Buying Property Subject to Finance
1. To seek a loan from a Financier to provide monies to purchase the property on or before 5:00pm on [Contract_Finance_Date].
This simply states that you have the right to approach a mortgage broker and/or bank(s) in order to get a mortgage set up. This clause exists in the unlikely event that someone tries to stop you from approaching financial institutions to get financing.
2. For the terms of the loan being provided by the Financier to be satisfactory to yourself.
This clause states that you are not obliged to take the loan if you don't like the terms. In other words, if you don't agree with the terms of the loan then, even though you've been offered a loan, you don't have to proceed.
This clause exists to protect buyers from unacceptable interest rates or anything about the loan that might make it hard for you to pay it in the future.
3. To terminate the contract in the event that you cannot obtain a loan or are not satisfied with the terms of the loan being provided.
If you can't get a loan or you can't get a loan you're satisfied with, then you're not obliged to go ahead with the property purchase. In these circumstances you can cancel the contract without any penalty.
4. To waive the finance condition in the event that it is no longer required for whatever reason.
If your financial circumstances change and you no longer need a loan to buy the property you don't need to wait until the financial clause ends to buy the property.
So if you hit the jackpot or rich Aunt Mary suddenly gives you a lump sum you can go ahead with the purchase immediately. Now wouldn't that feel nice?
Your Obligations When Buying Property Subject to Finance
1. To take all reasonable steps to obtain approval of a loan on or before 5:00pm on [Contract_Finance_Date].
Reasonable steps mean making an application to a Financier for the purpose of obtaining a loan. In other words you are obliged to actually apply for a mortgage. No excuses.
2. To notify us on or before 5:00 pm on [Contract_Finance_Date] of your decision to proceed with or terminate the contract.
The contract will lay out a date and time by which you need to notify your lawyer about the outcome of your mortgage application.
In other words, if you can go ahead with the purchase because you got a mortgage, or if you can't go ahead because your application was refused or the mortgage terms weren't acceptable.
Your lawyer will then contact the seller's lawyer to update them.
3. If your decision is to terminate, it must be on the basis that you have taken all reasonable steps to obtain a loan from a Financier and you have either been declined or you are not satisfied with the terms of the loan.
This final condition just reiterates that if you decide to terminate the contract under the finance clause it must be because either you didn't get a loan or you don't agree to the terms of the loan.
No other reasons, such as not having time to complete your mortgage application, are acceptable.
What happens if a buyer can't meet their financial obligations?
Failure to meet your obligations will allow the seller to terminate the contract.
However, if you cannot meet your obligations for any reason, you can request an extension of time.
But you should note that the seller is not obligated to grant any extension and can terminate the contract after 5:00pm on the contract finance date.
Want to know more about your rights and obligations as a buyer or seller?
Contact us now for informed advice on conveyancing. We’ll talk you through the essential conditions or clauses that should be included in a contract based on your unique circumstances and your rights and obligations after signing.