A young couple had pre-approval for finance issued a month ago to buy a property.  They inserted a two working day finance approval clause in their Agreement for Sale and Purchase to buy a property as they thought any remaining approval by the bank would be a quick process.  This clause was accepted by the vendor. 

When they contacted their bank, they were told the bank would need an extra two weeks to work through their application again, as some changes had been made to the bank’s requirements. 

They asked the vendor for an extension to the timeframe for the finance condition, but the vendor would not agree as they had other back up offers waiting in the background. 

The couple therefore decided to cancel the contract on the basis that they couldn’t confirm the finance condition in the timeframe required as they, sensibly, did not want to take the risk of having their finance application declined and not being able to settle the purchase on the settlement date.

Recent changes to the Credit Contracts and Consumer Finance Act mean that banks will now be required to make more detailed inquiries with purchasers/borrowers regarding the affordability and suitability of loans when approving borrowing for mortgages.  The purpose of the changes is to attempt to protect purchasers/borrowers from unaffordable debt in future.

This means that the process of applying for a mortgage, and obtaining pre-approval will take longer than usual.

If you are buying a property, you will need to be aware that this will have an effect on what timeframes are reasonable in a finance clause in an Agreement for Sale and Purchase. 

Given the pressure we are currently seeing that the banks are under, we would recommend that purchasers check with their banks before making an offer as to what timeframe would be realistic for finance to be approved.  If shorter periods are added to Agreements for Sale and Purchase, then often they end up having to be extended, which can result in the settlement date no longer being realistic.  In other cases contracts will fall over given purchasers will not be able to meet the required timeframes.

If not including a finance clause, you should otherwise make sure you have secured finance prior to making an offer.  You need to be aware though that, in order to do so, you will need a letter of offer for that particular property, rather than a general pre-approval letter from your bank.  The need for this has become more important than ever, given some banks are cancelling some pre-approvals they have previously issued given the above changes.

You should also ensure a realistic settlement date is included to avoid having to negotiate extensions to the settlement date if the finance date needs to be extended.

It is important to take advice from your legal advisor before signing an Agreement for Sale and Purchase, to avoid being caught out.

 


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