Buying a property is a big financial commitment, and unless you’re paying in cash, you’ll need a home loan to make it happen. But what if your financing falls through after you’ve signed the contract? The subject to finance clause is designed to protect buyers in exactly this situation.
This little clause can be the difference between walking away with your deposit intact or being legally bound to a purchase you can’t afford. Whether you’re a first-time buyer or a seasoned investor, understanding how this clause works can save you from unnecessary financial stress.
Here’s what you need to know to protect yourself when signing a property contract.
What Does ‘Subject to Finance’ Mean?
The ‘subject to finance’ clause is a condition in a property purchase contract that allows a buyer to back out of the deal if they are unable to secure a home loan within a specified timeframe. Essentially, it acts as a safeguard, ensuring that buyers are not legally obligated to complete the purchase if their financing falls through.
Why Does It Exist?
Buying a property is a significant financial commitment, and not all loan applications are approved – even if a buyer has pre-approval. The ‘subject to finance’ clause exists to protect buyers from being forced into a contract without the necessary funds. Without this clause, a buyer could risk losing their deposit or even facing legal action if they are unable to complete the purchase.
How the ‘Subject to Finance’ Clause Works
Standard Timeframe
Typically, the ‘subject to finance’ clause provides buyers with 14 days to secure full loan approval. This timeframe can sometimes be negotiated, depending on the market conditions and agreements between the buyer and seller.
Process
- Buyer Applies for a Loan: Once the contract is signed, the buyer formally applies for financing with their lender.
- If Approved, the Purchase Proceeds: If the lender grants full approval within the agreed timeframe, the contract moves forward, and the buyer must complete the purchase.
- If Denied, the Buyer Can Exit the Contract: If the loan is not approved, the buyer has the right to terminate the contract without financial penalty, provided they have met the conditions set out in the clause.
What Happens if Finance Isn’t Approved?
- Contract is Terminated: If the buyer cannot obtain finance, they must notify the seller (usually in writing) before the deadline.
- Buyer May Need to Provide Proof of Loan Rejection: Some contracts require buyers to show evidence from their lender that their application was declined.
- Deposit is Refunded (Subject to Contract Terms): If the clause is properly included and the buyer follows the contract’s conditions, they should receive their deposit back. However, failure to notify the seller within the agreed timeframe could result in the deposit being forfeited.
Why Is This Clause Important for Buyers?
1) Avoids Financial Risk
One of the biggest advantages of a ‘subject to finance’ clause is that it protects buyers from being legally bound to a purchase if their loan application is denied. Without this clause, a buyer who cannot secure financing would still be obligated to complete the purchase or risk losing their deposit – and potentially facing legal consequences. This safeguard ensures that buyers don’t commit to a property they ultimately can’t afford.
2) Provides Negotiation Power
Having this clause in a contract allows buyers to make offers with confidence, knowing that they won’t be financially trapped if their loan doesn’t go through. It also puts buyers in a stronger position when dealing with lenders, as they have a property under contract while finalising their financing, rather than scrambling to secure a loan before making an offer.
3) Gives Time for Formal Approval
Even if a buyer has pre-approval, formal loan approval isn’t guaranteed until all financial checks and property valuations are complete. The ‘subject to finance’ clause provides 14 days (or another agreed timeframe) for the buyer’s lender to finalise the loan without pressure. This allows time for any additional documentation requests, valuation concerns, or minor financial adjustments to be addressed before proceeding with the purchase.
Risks and Limitations of ‘Subject to Finance’
1) Not Always Accepted
In competitive property markets, sellers may prefer offers that are not subject to finance, as unconditional offers provide more certainty that the sale will go through. In a multiple-offer situation, a seller might choose a lower, unconditional offer over a higher one with a finance clause to avoid delays or complications.
2) Tight Deadlines
Buyers must adhere to the strict timeframe outlined in the contract (usually 14 days). If their lender is delayed in processing the application or requests additional information, the buyer may need to request an extension from the seller. If an extension isn’t granted and the finance isn’t approved in time, the buyer may be forced to either proceed without financing (a risky move) or forfeit their deposit.
3) Contractual Obligations
To fully benefit from a ‘subject to finance’ clause, buyers must comply with all contract conditions, including providing proof of loan rejection if finance is denied. Failure to meet these obligations could result in the clause becoming invalid, meaning the buyer could still be held responsible for completing the purchase or risk losing their deposit.
How to Ensure Your ‘Subject to Finance’ Clause Protects You
Not all finance clauses are written the same way, and vague wording can create loopholes that may put your deposit at risk. Work with a solicitor to ensure the clause clearly states:
- The timeframe for finance approval.
- What happens if approval is delayed or denied.
- Whether written proof of rejection is required.
Having a well-drafted clause ensures there’s no ambiguity and provides a clear exit strategy if financing falls through.
What Happens if You Proceed Without This Clause?
- Full Financial Liability: If you enter a property purchase contract without a ‘subject to finance’ clause, you are legally obligated to complete the transaction – even if your lender declines your loan application. This means you’ll need to find alternative funding (such as a guarantor loan or private lending), which can be costly and stressful.
- Risk of Losing Your Deposit: If you fail to settle the purchase because financing wasn’t secured, the seller may have the right to keep your deposit and potentially seek further compensation. This could result in significant financial loss, particularly if the deposit was a large percentage of the purchase price.
Who Should Consider Going Without It?
In some cases, buyers may proceed without a finance clause, but it’s typically only advisable if:
- You are a cash buyer and do not require a loan.
- You already have unconditional loan approval (not just pre-approval).
- You’re in a highly competitive market where sellers prefer unconditional offers, and you’re willing to take the financial risk.
Unless you are completely certain about your financing, waiving this clause can be a risky move. If in doubt, always seek professional legal and financial advice before committing to a contract without finance protection.
At WHY Property Investment, we help buyers secure the right property at the right price while ensuring they understand the risks, opportunities, and negotiation tactics that can make or break a deal. Whether you’re a first-time investor, an experienced buyer, or looking to expand your portfolio, our team provides tailored support at every step.
Have questions or ready to take the next step in your property journey? Get in touch with us today by filling out the enquiry form.