In most cases when a person buys a property, he or she will have to apply for a home loan, and this would be written into the offer to purchase (OTP) as a suspensive condition, giving a certain timeframe for the bond to be obtained by the bank and accepted by the buyer.
What happens, though, if all seems fine, until the bank sends their quotation through to the buyer and he or she finds the interest rate is too high or the amount they are willing to finance is too low in terms of the loan to value? Either of these scenarios would possibly make the property unaffordable to them, or an unacceptable proposition, says Michael Bauer, managing director of property company SAProperty.com.
Could the buyer protect themselves by including the condition that apart from the sale being subject to their home loan being obtained with acceptable terms to the buyer at their sole discretion, that it has to be at a favourable interest rate and the full amount needed?
If a bank approves a home loan, the approval is given ‘In Principle’, meaning that their conditions must be met for the full amount to be granted or favourable interest rate to be offered. The property will be valued prior to finalising the loan to ensure that it holds its worth against the amount to be borrowed, and once they do find value, they will send a quotation to the buyer offering them x amount at x interest rate. The four major banks’ loan-to-value requirements differ slightly, but in most cases 100% bonds are still very difficult to obtain. It is best, therefore, to ask a bond originator to ‘shop around’ for the best deal possible, says Bauer.
To protect themselves, the buyer could add the additional requirement to the suspensive condition in their offer, so that they are protected and know that they only have to accept if the bank’s offer is favourable. If this is included, Bauer says the buyer can walk away from the deal with no repercussions.
However, if the OTP only states that it is subject to home loan approval - without a clause specifying that the buyer should find the terms acceptable, the buyer is by law necessitated to proceed with the sale if his or her bond application is approved by the bank, regardless of whether the terms are unfavourable.
It has to be remembered, too, that if the bank conditions are different to what was written in the offer to purchase, that the OTP needs to change, and once the buyer signs the changed offer, they are bound by this contract to fulfil their obligations. The attorney will request the difference be paid in full by a certain date, and while the buyer may request an extension, if they don’t fulfil this, they can be put to terms.
“It is important to be absolutely sure that the offered amount is fully affordable, and that, if the bank doesn’t lend the amount needed, that you do not overextend yourself in trying to obtain the finance needed,” says Bauer.
“Rather walk away and either reconsider the type of property, the amount to buy for, which sometimes just needs an adjustment in area or a slight compromise in size, or wait until a bigger deposit has been saved. This would increase the chances of getting an offer accepted, as well as make the property purchase less stressful in terms of finance.”