ConveyancingHow Many Days Should I Allow In My Finance Clause?

December 5, 2018

Do you want to buy your first home, need a change of scene, or outgrowing your current residence?

Are you purchasing an investment property, or assisting your child with purchasing their first home?

Either way, if your contract is reliant on finance from a bank or lending institution, then a combination of increasing regulations and the Royal Commission into banking have created a significant change in the market which effect almost all conveyancing contracts that are subject to finance.

To explain this, consider that including a finance condition into a contract makes the contract conditional on the buyer obtaining satisfactory finance approval from a lender such as a bank or credit union. To satisfy the condition, you make an application to a lender, and provide to the lender the signed contract for them to assess and come back to you with an approval that they will lend you the amount you require on the specific property you are purchasing. You send a copy of the approval to your solicitor, who then lets the seller know that the contract is no longer conditional on obtaining finance approval. Historically, contract clauses have been 14 days which was considered by most lenders a maximum amount of time they would need to process an application.

Frequently we are seeing an increase in the time this process takes, and in the time from finance approval to the date the lender is ready to bring funds to settlement. Whilst banks are lending, speaking directly with bankers and mortgage brokers we are told there is an increase in their internal checks and balances for assurance of the borrower’s ability to repay the loan, and this is causing added paperwork and delay in time.

Recently, we are seeing a majority of contracts requiring extensions to finance days which is then potentially causing delays in settlement, stress for the buyers and stress for the sellers.

To make the process smoother when negotiating a contract, we recommend that you ask for a minimum 21 days for your finance condition, and a settlement date that is 45 days from the Contract date. Whilst it might be desirable for things to move faster – if you are borrowing money the lender will have an impact on the timeline of the property transaction.

If the lender is ready sooner, your solicitor can notify of your finance approval earlier, and request an earlier settlement – this seems to cause both buyers and sellers less anxiety than requesting an extension of the finance approval date.

Also worth consideration for buyers are circumstances where obtaining finance can become even more complicated due to factors influencing the property. You should consider possible longer finance periods where any of these factors apply to you or your property:

  1. You are borrowing more than 80% and either have a guarantor or require lenders mortgage insurance;
  2. There has been a period of employment disruption for a purchaser; and
  3. You have finance agreements other than your home loan which could include personal, educational or business liabilities.

In summary when it comes to finance condition in residential contracts, you may consider the following:

  • Ask for 21 days for your finance condition, even if you have pre-approval;
  • If you require an extension for finance approval, unless you have a long settlement period, you will likely need to request an extension of the settlement date;
  • An initial lending amount verification, and even a pre-approval does not always result in lenders processing your application faster, particularly where there is anything complex about the transaction, or your finances;
  • Consider if there are public holidays in the contract period, and account for these as non-working days; and
  • Obtain a pre-approval that is based on full-disclosure with your lender.

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