When buying off the plan, buyers usually only need to pay a deposit upfront, with the balance payable once the project is completed. Because settlement often takes place two or three years later, many buyers assume they can sign the contract first and arrange finance over time. However, an off-the-plan contract fixes the purchase price and the buyer’s obligation to settle. It does not fix their income, visa status, bank lending policies or the property’s valuation several years into the future. If the bank refuses finance at settlement and the contract does not expressly make the transaction conditional on finance approval, the buyer usually cannot withdraw simply because their loan was not approved.
Why can a loan still be refused at settlement if you had pre-approval when you signed?
Loan pre-approval is only a preliminary assessment of borrowing capacity based on the buyer’s income, debts and living expenses at the time. It is usually valid for only a few months and is not unconditional loan approval for several years later. As settlement approaches, banks generally reassess income, credit history, existing loans, credit card limits, household expenses and visa status. The bank’s own lending policies and calculation methods may also have changed.
For example, a buyer may have a stable income and no other loans when signing the contract, but change jobs, take out a car loan or face a substantial increase in household expenses before settlement two years later. Even if the property’s price has not changed, the bank may still reduce the loan amount or refuse finance altogether.
The bank will also reassess the property itself. Final loan approval depends not only on the buyer’s ability to repay, but also on whether the bank is willing to accept the property as security at the expected value.
Why does the buyer still need to settle if the bank refuses finance?
Once an off-the-plan contract takes effect, the buyer commits to paying the balance of the purchase price when the project is completed and the settlement conditions are met. The developer, in turn, commits to completing the project and transferring the property in accordance with the contract.
In New South Wales, for example, off-the-plan contracts usually have a cooling-off period of ten business days. Once that period ends, if the contract has no express subject to finance clause, a drop in income, a change in employment or visa status, overseas funds failing to arrive in time, or a bank’s refusal to lend will usually remain the buyer’s financing risk.
Needing a loan therefore does not mean that finance protection is automatically included in the contract. Whether a buyer can withdraw because finance has fallen through must be assessed against the specific contract terms.
A low bank valuation may mean the buyer needs more cash
The off-the-plan purchase price is fixed when the contract is signed, but the bank often does not revalue the property until close to settlement.
For example, if the off-the-plan contract price is AUD 1 million, the buyer may plan to borrow 80%, or AUD 800,000. If the bank values the property at only AUD 850,000 at settlement and lends 80% of that valuation, the actual loan amount may be only AUD 680,000.
The buyer’s required contribution may then rise from AUD 200,000 to AUD 320,000, with taxes, fees and other settlement expenses to be considered on top of that.
A bank valuation below the contract price generally does not automatically change the contract price. Unless the developer agrees to renegotiate, the buyer still needs to complete the purchase at the agreed price.
Act promptly if you discover a funding shortfall close to settlement
If a loan or funding problem arises, promptly establish whether the issue is an insufficient loan amount, a low bank valuation or a loan application that cannot be approved. You can then assess whether it is possible to change lenders, contribute more of your own funds or adjust the financing arrangements.
A lawyer can also review the contractual settlement deadline, extension costs, assignment restrictions and the buyer’s other rights.
If the contract permits assignment, the buyer may try to find another buyer to take over the contract, but this usually requires the developer’s consent and may involve additional costs. The buyer can also try to negotiate an extension of settlement or termination of the contract, but the developer is usually under no obligation to agree.
The closer the settlement date, the less room there usually is to manoeuvre. It is therefore inadvisable to leave financing problems until just a few days before settlement.
If the buyer cannot settle, losses may exceed the deposit
If the buyer cannot settle on time, the developer may issue a notice to complete under the contract, requiring the buyer to complete the transaction within a specified period, and charge late interest and related costs.
If the buyer still cannot settle when that period expires, the developer may terminate the contract and forfeit the deposit. If the property is then resold for less than the original contract price, the developer may also seek to recover the resale shortfall, resale costs, interest and other losses from the original buyer under the contract.
A 10% deposit is therefore not necessarily the limit of the buyer’s losses. The specific consequences still depend on the contract’s default provisions and the losses the developer actually suffers.
Project delays or significant changes may give the buyer other rights
If the project remains unfinished for a prolonged period, the contract’s sunset clause needs to be checked.
A sunset clause usually sets a final date by which the developer must complete plan registration, obtain an occupation permit or satisfy other project conditions. If the deadline passes without the relevant conditions being satisfied, the buyer may, in some circumstances, have a right to terminate the contract and recover the deposit.
However, sunset clauses differ between off-the-plan contracts. The specific matters tied to the sunset date, whether the developer can extend it, when the buyer must give notice of termination, and what obligations remain for both parties after termination all need to be confirmed.
If the developer notifies the buyer of changes to the property’s size, layout, building materials, parking spaces or shared facilities, the buyer may also have other contractual or statutory rights. For significant changes that materially affect the property’s use or liveability, there may, in some circumstances, be a choice between terminating the contract and proceeding with the purchase while seeking compensation.
Even if the buyer is also experiencing loan difficulties, the contract should therefore be checked for an independent right to terminate, rather than assuming that default is the only way out.
NS Legal’s closing thoughts
Off-the-plan projects have long construction periods. Buyers cannot base their purchase decision solely on loan pre-approval at the time of signing: income, family arrangements, visa status, lending policies and property valuations may all change over the following years, while the contractual obligation to settle has already been fixed.
NS Legal’s property transaction lawyers can help review an off-the-plan contract’s settlement conditions, sunset date, the developer’s rights to extend deadlines and change the design, finance conditions, assignment restrictions and the buyer’s liability following default. We can also help buyers understand how different clauses affect future settlement risks.
If the project is nearing settlement and finance is still not in place, contractual rights and feasible financing or negotiation options should also be reviewed early, to avoid losing further options by leaving matters too late.
Disclaimer: This article provides general legal information only and does not constitute legal advice for any individual circumstances.
