04 Mar 2019

Why buyers should think twice about a finance clause

Tightening lending restrictions and a return to a bear market, it’s no wonder property buyers might be thinking more about including a finance clause in their negotiations, says Australia’s leading association representing professional buyer’s agents.

Real Estate Buyers Agents Association (REBAA) vice-president Cate Bakos said in the current climate a finance clause could give comfort to a borrower who could not financially bridge the gap in the unlikely event of a valuation shortfall.

She also warned off-the-plan buyers that they must anticipate delays beyond their typical three-month pre-approval timeframe or risk getting caught out.

“If buyers have any doubt about their future chances of getting the same pre-approval reactivated at a later date for such a purchase they should proceed with high caution,” said Ms Bakos. 

“If a settlement delay for an off-the-plan purchase pushes past the three-month period and the pre-approval is no longer active or able to be reactivated due to policy changes or a buyer’s own change in employment circumstances, the buyer will find themselves in hot water if they can’t finance the purchase by other means.”

She said it was unusual that an agent would allow a buyer to bid at auction with a finance clause in place but not impossible.

“When an agent would rather have certainty of bidders, albeit finance-clause bidders, they may just say yes,” said Ms Bakos.

“Just be clear with the agent that you can’t buy unconditionally under the hammer, because if you aren’t clear and the property is placed on the market when your hand is in the air, you may just be buying unconditionally. It’s not a tactic to be cavalier about. “

When it comes to finance clauses, REBAA reveals three of the most common myths:

Myth#1: You can’t have a finance clause on an auction purchase

It is unusual that an agent would allow a buyer to bid at the vendor’s reserve price with a finance clause in place, but it’s not impossible. If the vendor and their solicitor agree to permit it, the buyer may just get their chance to bid. It has a higher chance of being permitted in bear markets like the one we are currently in. When an agent would rather have certainty of bidders, albeit finance-clause bidders, they may just say yes.

Myth#2: If you don’t obtain finance in time and wish to exit the contract on the basis of your finance clause, you can do so – no questions asked

If the loan is not approved by the approval date or any later date allowed by the vendor, the purchaser’s deposit must be immediately refunded and the contract ended. However, under the law, the purchaser must do everything reasonably required to obtain approval of the loan. Delaying or doing nothing is not an adequate reason to exit the contract. A buyer who chooses to rely on this ‘out’ should expect some rigorous debate from the vendor’s solicitor, including a request or the decline letter and proof of demonstrable and timely efforts to obtain the finance. In some states, like NSW, where a property is exchanged under a cool off period there are penalties for withdrawing from the contract.  

Myth#3: You don’t need a finance clause if your pre-approval is granted by the lender

This is the most critical of all three myths. There are several different types of pre-approvals and they all offer varying degrees of assurance. In instances where pre-approval is given verbally, online or is not credit-assessed, it cannot be relied upon and a finance clause is recommended, (or further effort made to secure credit-assessed pre-approval should be sought). In cases where credit has been assessed and pre-approval granted, it’s essential to be familiar with the types of properties banks have concerns about i.e. high-rise apartments, quirky zoned property, off-the-plan or any damaged or very run-down properties. If in doubt, insert a finance clause.