What’s the subject to finance clause? (And who cares?)

'Subject to finance' is a term you'll often see in a contract when you buy a property. And it is there to help you.
A subject to finance clause gives you the option of terminating your contract and getting your deposit back if your home loan 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.

Lenders don't process a home loan application until you have a property to act as security. So, when you're at auction or putting an offer in for a house, it's likely you won't have the loan finalised.

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 of finance.

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 finance 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.

How do you breach a subject to finance clause?

The clause will have conditions that you need to meet, including getting your loan approved (or not) by a certain time.

You have also committed to buying the house on the condition of finance, so if you decide to pull out for other reasons, you may not be protected and could lose your deposit.

Because you're legally obligated to buy the property, the seller could force you to go ahead with the purchase. You could also incur costs if you pulling out of buying the property has implications on the seller. For example, if they were relying on the funds to purchase their next property.

Be sure to check the wording and specificity of the clause to ensure you're protected.

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 or conveyancer 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.

How long is the subject to finance clause?

The subject to finance clause typically gives you 14 days to secure finance. It can be as much as 21 days, but can also be as few as 10 days. Read your agreement carefully to make sure you have enough time. If you're worried you need more time, you can try to negotiate. 21 days is usually the maximum, however.

How to make sure you're approved for your home loan.

Obviously, the best outcome is to just be approved for the home loan and not need to rely on the subject to finance clause!

Here are some tips to making sure you're in the best position:

1. Get pre-approval.

It's not a guarantee of getting a home loan when you apply properly, but it gives you a very good indication of the amount you'll be approved for.

2. Stay on top of your spending.

One reason you may be refused a home loan even if you've got pre-approval is because banks have taken a closer look at your bank statements. High careless spending or buy now pay later debts could be a red flag for lenders.

3. Don't try to borrow too much.

Your best chance of approval is with at least a 20% deposit, but if you're happy to pay LMI or have a first home buyer grant you can get a loan with a lower deposit. Just don't get carried away in a bidding war and then try to apply for an amount that reduces your chances!

Written by

Richard Whitten

Money Editor

Richard Whitten is Finder’s Money Editor, with over seven years of experience in home loans, property and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Graduate Certificate in Communications from Deakin University. See full bio

Richard's expertise

Richard has written 609 Finder guides across topics including:

• Home loans
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• Personal finance
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