Are you having trouble getting finance before your settlement date?

Is there a risk of failure to settle on your property?

The tightening of foreign lending by banks, the crack down on foreign investments by the federal government and the boom in apartment construction has resulted in the perfect storm of increased settlement risk.

While the demand for Australian property is still strong, it is prudent to be aware of the very real risk that it might be difficult to complete purchases in the current lending environment.

What will happen if you don’t settle?

If you are unable to settle by the agreed date due to difficulty in obtaining financing, the vendor may choose to exercise the following rights:

  1. Serve you with a rescission notice
    This gives you a further period of time to rectify the default. The period of time would depend on what is stipulated on the notice of default (usually 14 days).
    They may also charge you penalty interest at the rate of 2% on top of the rate fixed by the Penalty Interest Rate Act (which is 9.5%) until you come to an agreement to the amount paid for reasonable expenses incurred by the Vendor as a result of the default
  2. When the rescission notice expires
    The Vendor will then be entitled to collect your deposit and may put the property back to market for sale and/or sue you for any loss or damage which they may suffer together with any costs incurred as a result of the default.

What can you do to recover your deposit?

  1. Nomination
    If you think it is likely that you are unable to settle on the due date you may be able to nominate additional or substitute purchasers.
    Typically, a Contract of Sale will allow you to nominate purchasers at least 45 days prior to the settlement date. However, this is subject to the Vendor’s approval of the nomination.
  1. On-Sell the Property
    You may be able to on sell the property to another purchaser provided there isn’t a clause in your contract preventing you from doing so.
    This will involve two parallel contracts: One between you and the developer and another between the new purchaser and you.
    This method will require you seek someone to sell to.
    You should also be aware of the costs associated with a re-sell such as a double stamp duty paid by you on the original purchase and the new purchaser on the current purchase price.

How should I lower my settlement risk?

Prevention is always better than cure. Despite the increased settlement risk you might face in an uncertain lending landscape, we suggest the following ways to avoid running into issues

  1. Do your due diligence and get financial approval if possible before you buy.
  2. Don’t rely on the developer’s valuation. Get a second market valuation of the property if you can.
  3. Ensure that you have funds on hand if you are buying off the plan in case the valuation is below the purchase price.
  4. Do thorough research of the area to ensure that you are less likely to buy overpriced project. A good area to buy in should have a high demand and low supply.
  5. Do not sign an unconditional contract if you have doubts about buying off the plan. Review the contract with your lawyer to ensure that there are contingencies in your contract in the event that you need to break the contract.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Please contact Verity Law for further advice.