The finance clause is one of the most important protections a buyer has, and one of the most commonly misunderstood.
When you make an offer on a property in NSW, your lawyer or conveyancer will often recommend you include a ‘subject to finance’ clause in the contract. This gives you a window of time to arrange finance approval from your lender before you are legally committed to the purchase. If finance is not approved within that window, you can walk away and recover your deposit.
In practice, it is not always that straightforward. The clause must be drafted correctly, the conditions must be met precisely, and the timeframe must be reasonable for both parties. A poorly structured clause (or one that is not exercised properly) can leave you locked into a purchase you cannot fund, or exposed to potential claims from the vendor.
This article explains how subject-to-finance clauses work in NSW, the situations in which they fail, and what buyers should negotiate before signing.
Key takeaways
• A subject-to-finance clause gives buyers a set period to obtain formal loan approval before the contract becomes unconditional.
• If you cannot satisfy the conditions of the clause, you may lose your deposit or be sued for breach of contract.
• Timeframes are often too short. 14 business days is considered a minimum timeframe for most buyers.
• Pre-approval is not formal approval. Do not sign a contract without understanding the difference.
• The clause can be negotiated. Your choice of lender, loan conditions, and extension rights can all be addressed before exchange.
What a subject-to-finance clause actually does
A subject-to-finance clause makes the contract conditional on you obtaining finance approval from a nominated lender, on terms satisfactory to you, within a specified period. If approval is not obtained, you have the right to rescind the contract and recover your deposit.
The clause typically specifies:
1. The lender: the financial institution or type of institution from which approval must be obtained
2. The loan amount: usually expressed as a maximum amount, not a specific figure
3. The finance date: the deadline by which approval must be achieved
4. The conditions: what constitutes satisfactory approval (formal written approval, not pre-approval)
If you obtain approval before the finance date, you notify the vendor and the contract proceeds. If you cannot obtain approval, you notify the vendor in writing before the deadline and the contract is rescinded. If you do neither, the contract becomes unconditional by default.
Pre-approval is not formal approval
This is the most common misunderstanding among buyers. A pre-approval (also called conditional approval or approval in principle) is the lender’s indication that it would be willing to lend you a certain amount, subject to full assessment of the property and your financial position.
Pre-approval does not satisfy a finance clause. Formal approval (also called unconditional approval) is a written commitment from the lender to provide the funds for that specific property, based on a completed valuation and full assessment of your financial documents.
If you sign a contract on the basis of pre-approval alone, without having it reviewed by a Lawyer, you are taking on significant risk. Lenders may decline formal approval or reduce the approved loan amount after valuing the property. We highly recommend you review the Contract Review article on our website for a full explanation of what your lawyer will examine before exchange.
When subject-to-finance clauses fail
Buyers lose the protection of a finance clause in several common ways:
1. The finance date passes without action: if you neither notify the vendor of failure nor proceed to formal approval, the contract becomes unconditional automatically. You are then committed to the purchase irrespective of whether your finance has been formally approved.
2. Incorrect notification: rescinding the contract requires written notice from your solicitor to the vendor’s solicitor before the deadline. Verbal notice, an email to the agent, or notice given after the deadline will not be effective.
3. Approval does not match the clause: if your lender approves a lower amount than the purchase price, or attaches conditions not contemplated by the clause, it may not satisfy the finance condition. You must obtain approval on the terms specified.
4. Lender not specified correctly: some clauses name a specific lender. If you switch lenders after exchange, the clause may not apply to the new approval.
5. Vendor disputes the rescission: if the vendor believes you had the financial capacity to proceed and is rescinding opportunistically, they may challenge the rescission and seek to retain the deposit.
What timeframe should you negotiate?
Standard contracts in NSW may include a finance period of 14 calendar days. In practice, this can be an insufficient timeframe. A realistic timeline from exchange to formal approval typically involves:
- Submission of full loan application: 1–3 business days after exchange
- Lender assessment and valuation: 5–10 business days
- Formal approval issued: a further 2–5 business days
This is a minimum timeline under normal conditions, however, delays in document processing or a complex property or financial situation can extend this considerably.
A finance period of 14 to 21 business days is a more realistic request for most buyers. Vendors will often accept a longer period if the deal is otherwise attractive. Your lawyer can advise on what is reasonable for your specific circumstances, taking into account the current market situation.
Requesting an extension
If you are approaching the finance date and approval has not been issued, you can request an extension from the vendor. The vendor is not obliged to grant one, but many will if you can demonstrate that approval is progressing and is likely to be issued shortly.
Any extension must be agreed in writing by both parties before the original deadline passes. Do not assume a verbal agreement is sufficient. If the vendor refuses and the deadline passes without formal approval, you must make a decision: rescind the contract in writing before the deadline, or proceed and accept the risk.
What buyers can negotiate before signing
The finance clause is not a standard template that must be accepted as drafted. Your lawyer can negotiate the following before exchange:
- A longer finance period. Request 14–21 business days as a starting point.
- Flexibility on lender. If the clause names a specific lender, seek broader language such as ‘any approved financial institution’.
- A right to extend. Some contracts include a right to request one extension of a set number of days without vendor consent.
- Clarity on what constitutes approval. Ensure the clause specifies formal written unconditional approval, not conditional approval or pre-approval.
- Deposit held in trust. Confirm the deposit is held in trust and is returnable in full on rescission, without deduction.
Working with & Legal
Our conveyancing team reviews finance clauses on every purchase contract before exchange. We will advise you on whether the finance period is realistic, negotiate extensions where necessary, and ensure the clause is drafted to protect your interests, not simply in a standard format.
If you are approaching exchange on a purchase and need a contract reviewed, contact us at andlegal.com.au/contact. Our turnaround for contract reviews is 48-72 hours (24 hour turnaround’s are available for urgent cases). We also recommend downloading our companion checklist, the Subject to Finance: Buyer Due Diligence Checklist, available from our website, which sets out the steps to take before and after exchange when buying subject to finance.
Frequently asked questions
Can I sign a contract before my pre-approval expires?
Yes, but pre-approval does not satisfy a finance clause. You should not rely on pre-approval as confirmation that formal approval will be granted. Properties are individually valued, and a lender may adjust the approved amount or decline formal approval after assessing the specific property.
What happens if I rescind the contract? Do I get my deposit back?
If you rescind correctly within the finance period, the deposit is returnable in full. This is an incorrect assumption to make without reviewing the specific contract terms. Some contracts contain provisions that can complicate deposit recovery. Have your lawyer confirm the position before you act.
Can the vendor accept another offer while I am still within my finance period?
No. Once contracts are exchanged, the vendor is bound to sell the property to you, subject to the conditions of the contract. The vendor cannot accept another offer during that period. However, if the contract is rescinded, the vendor is free to re-list the property.
Do I need a finance clause if I am buying with cash?
If you are purchasing without a loan, a finance clause is not relevant. However, you should ensure your funds are accessible prior to settlement and that no other conditions apply to their release. A lawyer can advise on any additional protections appropriate for a cash purchase.
What if my finance is approved but the amount is lower than the purchase price?
If the approved amount is less than required to complete the purchase, this will not satisfy the finance clause unless the clause was drafted with a lower loan amount in mind. You may rescind the contract on the basis that finance was not approved on satisfactory terms, provided notice is given correctly and within time.
This article is general information only and does not constitute legal advice. Property law and finance conditions vary depending on the specific contract and your circumstances. You should seek independent legal advice before signing any contract for the purchase of property.