Understanding the Fine Print: How Bond approval could backfire on property buyers

Top 3 Key Takeaways

• Buyers may be bound to a property deal once an “approval in principle” is issued, even before agreeing on final terms.
• Sellers benefit from contracts where agreements become binding once financing is approved, but buyers face risks without clear terms.‍
• Buyers must be cautious about clauses regarding building plans and other conditions that could put their deposit at risk.

Introduction

In the world of property deals, the journey from offer to purchase to owning a home may seem straightforward, but one misstep could lead to costly consequences. A recent court ruling has sparked a conversation about when a property purchase agreement truly becomes binding, particularly when a home loan is involved. 

The ruling in favour of the seller has left some buyers questioning the fairness of binding contracts that come into play as soon as an ‘approval in principle’ is issued by a lender. Renier Kriek, MD of Sentinel Homes, weighs in on how understanding the process can protect buyers and ensure a smoother property transaction.

When Does Your Deal Become Final?

The central issue in the court case revolved around when exactly the agreement between a buyer and seller becomes final. This hinges on the concept of the suspensive condition, a key term in property contracts. According to Kriek, a suspensive condition means that the contract is not finalised until a specific condition - such as loan approval—has been met.

“Finance approval is not immediate,” Kriek says. “It’s a process, and the result comes in stages. When buyers sign an offer to purchase a property and request a home loan, they do so with the condition that the loan is approved within a set period. This makes the contract conditional on the loan’s approval.”

However, the issue arises when the home loan provider issues an approval in principle (AIP). While this may seem like a mere formality, it can trigger the binding nature of the contract, meaning the buyer is legally committed before they’ve fully accepted the financing terms. This is a critical moment for buyers to understand—the AIP can force them into a deal, even if they haven’t agreed to the final loan terms like the interest rate.

Risky Business: When Approval in Principle Binds You

From the seller’s perspective, Kriek notes that the ideal situation is for the agreement to become binding as soon as the AIP is issued. “It locks the buyer into the sale, ensuring that the seller has a guaranteed deal,” Kriek explains. However, this is a dangerous clause for the buyer.

For buyers, signing an agreement that binds them at the AIP stage could leave them at risk. If they haven't agreed to the full terms with their home loan provider, such as the interest rate, they might be stuck with conditions they don’t find favourable. Worse, they could lose their deposit or be forced into the purchase without any option to back out.

Kriek offers a key piece of advice: ensure that the sale agreement is only binding once the pre-agreement statement and quotation have been issued and accepted. This means that only after agreeing to the loan’s final terms should the buyer be locked into the deal.

Legal Pitfalls: The Nitty-Gritty you must Watch Out for

Beyond the bond approval stage, buyers need to be cautious about other elements that could turn their deal sour. One common issue is the requirement for approved building plans. Often, home loan providers will require these plans before agreeing to finance the property. 

However, if the sale agreement doesn’t include a clause that mandates the seller to provide these documents, buyers could be left to obtain them on their own. This might delay the process or even result in the deposit being forfeited if unauthorized building works are discovered.

Kriek also highlights the importance of ensuring that all conditions stipulated by the lender - such as building plans or zoning requirements - are included in the sale agreement. This ensures that the two documents align and that the buyer is not blindsided by conditions they were not expecting.

Expert Advice: Why You Should Seek Legal Counsel

The complexities of property transactions, particularly those involving home loans, cannot be overstated. According to Kriek, “Buyers should never rely solely on advice from a property practitioner or other parties connected to the seller.” Legal advice is crucial before signing any property purchase agreement.

Kriek advises that buyers should consult with a registered property practitioner, a bond originator, and most importantly, a qualified attorney to ensure that they fully understand the risks and terms of their agreement. Taking shortcuts could cost them dearly, both financially and legally.

Conclusion

The bond approval process, though seemingly straightforward, involves layers of legal and financial intricacies that can lead to unexpected consequences for buyers. Renier Kriek’s insights emphasize the importance of clarity and understanding when it comes to suspensive conditions, home loan terms, and potential pitfalls like building plan requirements. By paying close attention to these details and seeking expert advice, buyers can protect their investment, avoid financial risks, and navigate the property buying process with confidence.

Ultimately, being proactive and informed will help ensure that your property purchase remains a dream rather than a costly nightmare.

‍