What is a Finance Clause?
Definition
Finance Clause
A finance clause (also called a subject to finance condition) is a contractual provision that makes the purchase of a property conditional on the buyer obtaining formal loan approval from their lender within a specified timeframe. If the buyer cannot secure finance by the deadline, they can withdraw from the contract without forfeiting their deposit.
The finance clause is one of the most important protections available to property buyers in Australia. Without it, you are legally committed to completing the purchase regardless of whether your lender approves your loan. If you cannot settle, you risk losing your deposit and being sued by the vendor for damages. For a detailed walkthrough of how this clause works in practice, read subject to finance clause explained.
How Does a Finance Clause Work?
When you sign a contract of sale with a finance clause, the purchase is conditional on your lender granting formal (unconditional) loan approval. The clause specifies:
- The finance deadline: Typically 14 to 21 days from the contract date, though this is negotiable.
- The loan amount: The maximum amount you need to borrow for the purchase.
- The lender: Some clauses name a specific lender; others allow any recognised financial institution.
During the finance period, your lender conducts their valuation and credit assessment. If they approve your loan unconditionally, the finance condition is satisfied and the contract becomes unconditional (on that condition). If your loan is declined or not approved in time, you can exercise the finance clause to terminate the contract and receive your deposit back.
What Happens If Finance Is Refused?
If your finance application is declined before the deadline, you must notify the vendor (or their agent) in writing that you are exercising the finance clause. The process is:
- Obtain written confirmation from your lender that the loan was not approved.
- Serve written notice to the vendor or their solicitor before the finance deadline expires.
- The contract is terminated and your deposit is refunded in full.
If you fail to notify the vendor before the deadline, the finance condition may be deemed satisfied automatically, making the contract unconditional. This varies by state and contract wording, so always confirm the exact requirements with your conveyancer.
Conditional vs Unconditional Contracts
Conditional vs Unconditional Contracts
| Criteria | With Finance Clause | Unconditional (No Finance Clause) |
|---|---|---|
| Buyer protection | Can withdraw if finance is refused | No right to withdraw — must settle or face penalties |
| Deposit at risk | Protected — refunded if clause is exercised | At risk — may be forfeited if you cannot settle |
| Vendor preference | Less attractive to sellers in competitive markets | More attractive — gives vendor certainty |
| Auction purchases | Not available — auctions are unconditional | Default for all auction purchases |
| Typical timeframe | 14-21 days for finance approval | No finance period — settlement date applies |
| Best for | Most buyers, especially first home buyers | Cash buyers or those with guaranteed funding |
Need help understanding your finance options? Our home loan finance guide covers pre-approval, loan types, and what lenders look for.
Risks of Waiving the Finance Clause
In competitive markets, buyers are sometimes tempted to waive the finance clause to make their offer more attractive to the vendor. This is extremely risky:
- Deposit forfeiture: If your loan is declined and you cannot settle, you will likely lose your full deposit (typically 5-10% of the purchase price).
- Vendor can sue for damages: The vendor can pursue you for the difference if they resell the property at a lower price, plus their additional costs.
- Financial hardship: On a $1,000,000 property with a 10% deposit, you could lose $100,000 and face further legal claims.
Frequently Asked Questions
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